Attorneys voice concern over new federal joint employer status rule

Earlier this spring, the U.S. Department of Labor proposed a rule to address joint employer status under Fair Labor Standards, Family and Medical Leave, and Migrant and Seasonal Agricultural Worker Protection acts, a rule the department says would simplify compliance for employers and help employees understand their rights.

Should the proposed rule take effect, the DOL says it will achieve its other goal of resolving significant differences among circuit courts.

Whether that is true is under debate among Virginia employment attorneys.

Nicholas Woodfield, a principal at Washington, D.C.-based The Employment Law Group and past president of the Virginia Employment Lawyers Association, said the attempt to simplify could create a murkier legal environment.

“There’s a value to simplification, except when the simplification leaves everyone in a gray area,” Woodfield said. “As jobs become more developed in certain areas that were never thought of at the time that the Fair Labor Standards Act was enacted, I think it just makes it harder to figure out.”

McLean attorney Declan Leonard with Berenzweig Leonard said the proposed rule is par for the course, as the Trump administration aims to change course in the employment law space.

“This is the typical ping pong that occurs when there is a change of administration at the federal level when it comes to employment issues such as joint employer liability, as well as independent contractor
misclassification,” Leonard said.

The Labor Department‘s proposed rule addresses both “vertical” and “horizontal” joint employment.

In vertical joint employment, the department explained, the “employee works one set of hours, and there is no dispute that the employee has at least one employer for the work. The issue is whether another person that also benefits from the work is the employee’s joint employer.”

Vertical joint employment arrangements involve business partners that are higher or lower in a particular industry structure, such as contractors and subcontractors or staffing agencies and their clients. Courts have frequently had to grapple with the question of whether both are joint employers of the employee.

Circuit courts have developed several tests to evaluate that question, with some of the analyses involving as many as a dozen factors, the DOL noted.

Under the proposed new rule, a four- factor test seeks to simplify the picture in a way that lawyers view as pro-employer, though they differ on the degree.

The DOL is accepting comments on the proposed rule through June 22.

Woodfield cautioned that the drop in the number of factors may not achieve the government’s goal of clarity and simplification.

“These factors are very vague and they’re kind of in opposite, so when you’ve got very high-level factors, I think it makes it harder to prove you’re an employee as opposed to proving you’re not,” Woodfield said. “I think it just makes it murkier — the fewer guideposts you have, the less certainty you have.”

Two bites at the apple

The DOL rule is the second attempt by the Trump administration to address the joint employer issue.

The first act took effect March 16, 2020, and was subsequently challenged by 17 states and the District of Columbia. The federal government’s attempt ended in September 2020 when the U.S. District Court for the Southern District of New York vacated the standard for vertical joint employer liability in the DOL’s final rule titled “Joint Employer Status Under the Fair Labor Standards Act.”

The court allowed business groups such as the International Franchise Association, U.S. Chamber of Commerce, National Retail Federation, Associated Builders and Contractors, and American Hotel and Lodging Association to intervene as defendants in the case.

In that case, New York v. Scalia, the District Court concluded that the 2020 rule violated the Administrative Procedures Act because it conflicted with the FLSA in three ways, including its adoption of a control-based test for determining vertical joint employment and its prohibition against considering additional factors beyond control, such as economic dependence.

Once President Joe Biden took office in January 2021, the DOL rescinded the 2020 rule.

In its second bite at the apple, the Trump administration is seeking to remedy the deficiencies in the 2020 rule while also continuing to be guided by the U.S. Supreme Court’s 1973 decision in Falk v. Brennan, along with the “seminal joint employer decision” from the 9th U.S. Circuit Court of Appeals, Bonnette v. California Health & Welfare Agency.

Its new proposed 29 CFR §791.115(a) provides four factors to determine whether another person or entity is the employee’s joint employer in a vertical joint employment scenario. Those four factors are whether the other person or entity: hires or fires the employee; supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; determines the employee’s rate and method of payment; and maintains the employee’s employment records.

“Not only do the proposed factors epitomize the substantial control standard in Falk, they also derive from, and align with, Bonnette,” the proposed rule states.

Bonnette outlined four similar — but not identical — factors.

“The Bonnette factors are by far the closest thing to a common denominator applied by courts when determining FLSA vertical joint employment,” according to the proposed rule.

The DOL “believes that an analysis with fewer factors is preferable to, for example, the two-step-and-10-total-factor, 12-
factor, and 8-factor analyses applied by the Second, Ninth, and Eleventh Circuits, respectively,” it added.

Leonard noted that during the Biden presidency, the Labor Department sought to expand the definition of joint employer.

“Now, under Trump, that effort is being reversed and the definition of what constitutes a joint employer will greatly be narrowed once the proposed rule goes into effect,” he said. That impact can be felt by companies who may face less legal risk under the new rule.

“Whereas under the prior Biden administration, companies faced the very real prospect of being found liable for the allegedly wrongful acts of subcontractors and franchises, that legal risk will be greatly diminished under this proposed new Trump administration rule,” Leonard said.

Proposed test

The DOL’s proposed test embodies “the Bonnette factors with some modifications,” it acknowledged. For example, the DOL’s first factor asks whether the potential joint employer hires or fires employees, whereas the first Bonnette factor is whether the potential joint employer has the “power” to hire and fire the employee.

“This modification is consistent with courts’ focus in practice on whether a potential joint employer actually has hired or fired workers, as well as their general focus on ‘economic reality’ when assessing employment relationships under the FLSA,” the department said.

A potential joint employer’s reserved control would still be relevant to the analysis, though the actual exercise of control is more relevant, the department noted.

With the second factor, the DOL added the phrase “to a substantial degree” to the factor articulated in Bonnette.

“Because the facts underlying such supervision and control in a typical case do not generally yield binary outcomes (i.e., total supervision/control or a complete lack of supervision/control), the ‘to a substantial degree’ language simply reflects that there is some degree of such supervision/control in the middle (i.e., that is more than occasional and is in fact substantial) that tips this factor from not indicating joint employment to indicating joint employment,” the DOL said.

Reaction

Woodfield said that at first blush, the impact of the proposed rule would differ depending on which side an attorney represents — employers or employees.

“If you’re representing employers, I’d say you know there’s less guidance here and that you may have more exposure because you can’t necessarily prove they’re not an employee if the factors are not helpful,” Woodfield said. “If you’re looking at representing the cases, you might be reluctant to take them because you can’t be as certain that you win it.”

Woodfield also anticipated broad guidelines potentially causing challenges, namely as new jobs and employment spaces — with examples including “influencers” and jobs related to artificial intelligence — begin to blossom.

“They’re not like the North Star, where you know if you’re heading towards it, you’re always heading north,” Woodfield said. “If you’ve got the North Star, and you’re traveling underground, it doesn’t give you any guidance. It’s tough with new jobs, because some broad rules still apply, but it is very, very hard to figure out.”

Woodfield juxtaposed this idea with the fact that when the FLSA was enacted, “there were no computer employees,” meaning federal guidance had to evolve. “Now if you have someone who comes in, and they are an AI influencer doing something to benefit some employer, these factors are very vague.”

Leonard’s takeaway from the proposed rule is that companies “now have to worry less about inserting things like indemnification clauses into their subcontractor agreements, since the chances of being named as a defendant in a lawsuit for those they do not directly employ are so much less under this new proposed rule.”

However, Leonard said there is still value in including such clauses.

“Indemnification clauses provide much broader protection than just joint employment claims, so they are still a very wise inclusion,” Leonard noted. He also predicted that looking ahead, there will be “little enforcement on the federal level of joint employer liability” and said the process carries potential harms for both employers and employees navigating the system.

“The whole process is actually quite tedious and unfair to employers and employees alike, because it robs both sides of the clarity and predictability needed over the long term to properly plan,” Leonard said. “It also inserts an unnecessary tension in workplace relations that really does not need to be there.”

Related Case

• New York v. Scalia