Southern District of New York


S.D.N.Y. Strikes Down Limitation On Joint Employer Liability

By Sandra Gibbs on November 19, 2020

In State of New York v. Scalia, decided September 8, 2020, the Southern District of New York partially granted the plaintiffs’ motion for summary judgment, striking down a portion of the U.S. Department of Labor’s final rule (the “Final Rule”) narrowing the definition of joint employment under the Fair Labor Standards Act (“FLSA”). Eighteen states had challenged the Final Rule, alleging a violation of rulemaking procedures under the Administrative Procedure Act (“APA”). The court invalidated the four-factor test set forth in the Final Rule, once again heightening franchisors’ risk of liability under the FLSA as joint employers of their franchisees’ employees.

The Final Rule, which was adopted by the Trump Administration’s Labor Department, established a four-factor test for determining whether a person is a joint employer, namely, whether the putative joint employer:

  • 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.

These factors had been developed and applied in previous caselaw. See, e.g., Bonnette v. California Health & Welfare Agency (9th Cir. 1983). Following a rulemaking proceeding, the Labor Department explicitly adopted them in the Final Rule, replacing a more expansive agency interpretation adopted by the Obama Administration’s Labor Department.

The Scalia court began its analysis by focusing on the history of the FLSA, and the extraordinary breadth of the terms “employ,” “employer,” and “employee” – in the statutory definition and as applied in the case law. The test for an employment relationship had long been recognized as resting on “economic reality,” dependent on the “circumstances of the whole activity,” rather than on isolated factors. Scalia, quoting Rutherford Food Corp. v. McComb (U.S. 1947). The court then noted that the concept of “joint employment” had been recognized by courts almost since the enactment of the FLSA, although it deemphasized the common thread running through such “joint employment” cases: fact patterns reflecting control of the employee by the putative joint employer, and tests seeking to identify such control.

Neither the FLSA nor the regulations promulgated under the FLSA defined the term “joint employment.” Labor Department guidance issued under another federal statute, the Migrant and Seasonal Agricultural Workers Protection Act, indicated that the term should be interpreted under the same “economic reality” test applied to the term “employ” under the FLSA. In Administrator’s Interpretations (“AIs”) issued in 2014 and 2016, this “economic reality” standard was, for the first time, explicitly applied to the term “joint employment” under the FLSA. These AIs explicitly eschewed a focus on the right of control as “unduly narrow.” The Final Rule overturned these AIs and sought to reestablish control as the touchstone for joint employer status under the FLSA; in doing so, the Labor Department determined that the test for joint employment should be different, and more narrow, than that for “primary” employment.

The Scalia court disagreed: “Put simply, the tests for primary and joint employment must be the same.” Any other interpretation is arbitrary and capricious, the court held, and therefore a violation of the APA. This striking conclusion was based on the court’s view that, in promulgating the Final Rule, the Labor Department had failed to account for the broad definitions of “employ,” “employer,” and “employee” in the FLSA, and had failed to justify its departure from its previous interpretations of the term “joint employer.” In addition, the court held that the agency had failed to consider the increased costs that would likely be associated with implementation of the Final Rule, including higher enforcement costs borne by state governments in light of diminished federal enforcement, and inability of employees to obtain redress for wage-hour violations if their “primary” employer “flakes on its legal obligations.”

This case report was prepared by Sandra Gibbs (sgibbs@mulcahyllp.com) of the law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation and regulatory firm that provides legal services to franchisors, manufacturers and other companies in the areas of franchise, trademark, trade secret, unfair competition, and distribution laws.

Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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