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Think Again!

In recent years, the Department of Labor has enacted various rules to shield large corporations and general contractors from liability arising from the actions of their subsidiaries, subcontractors, and temporary employment agencies. In January 2020, the Department of Labor (“DOL”) attempted to narrow the definition of “joint employer” underthe Fair Labor Standards Act (“FLSA”)—the statute that protects an employee’s right to minimum wage and overtime. In particular, the DOL proposed a new four-factor balancing test to determine when an employer may be considered a “joint employer.” Those factors are: whether the company: (i) hires or fires the employee; (ii) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (iii) determines the employee’s rate and method of payment; and (iv) maintains the employee’s employment records.

To understand the impact of this proposed rule, we present you with two scenarios:

Scenario 1: Imagine that you work for a temp agency, Temp. Co., that hires you out to a large company, Large Corp. Although you get paid by Temp. Co., you go to work every day at Large Corp. and Large Corp. employees tell you what to do. Temp Co. determines your rate and method of pay and maintains your employment records—as most temporary employers do. Also, imagine that you work sixty hours a week but get paid for forty. That’s illegal under the FLSA. You sue for the overtime wages you’re owed—but Temp. Co. goes bankrupt. Can you also sue Large Corp.? Maybe. It depends on whether Temp. Co. and Large Corp. are a “joint employer” under the FLSA.

Scenario 2: Imagine that you are a carpenter working for a subcontractor with annual sales of less than $500,000. The subcontractor hired you, determines your rate and method of pay, and maintains all employment records as most subcontractors do. You work fifty-five hours a week but get paid for forty because the subcontractor is running low on funds. Under the FLSA, businesses with less than $500,000 of annual sales are not liable for unpaid overtime wages. Can you also sue the general contractor for wages owed? Again, the answer is maybe and depends on whether the general contractor and subcontractor are considered a “joint employer” under the FLSA.

As you can imagine, under the test created by the current Department of Labor, it would be almost impossible for the employees described to recover the overtime wages earned and owed to him or her.

Fortunately, on September 8, 2020, a federal district judge for the Southern District of New York entered an Order striking down this proposed four-factor test making it easier for employees to vindicate their rights. In State of New York, et al. v. The United States Department of Labor, et al., the State of New York and eighteen other states sued the Department of Laboralleging the proposed rule violated the Administrative Procedure Act. In striking the proposed rule, the Court found:

(i) The rule “clearly contradicts the text of the FLSA” which provides for liability if an entity “directly or indirectly” … “suffers or permits an employee to work.”
(ii) The rule was impermissibly narrow. The Court noted that the new rule focuses on the common-law definition of employment focusing on control which the FLSA expressly rejects by defining the verb “employ” expansively to mean “suffer or permit to work.”
(iii) The rule prohibited consideration of additional factors in further conflict with the FLSA and prior interpretations.
(iv) The rule was arbitrary because the Department failed to adequately explain its decision to depart from prior interpretations and would result in numerous employees who were unable to collect wages owed. The evidence provided to the Court indicated that the rule would cost workers $1 billion per year.

Depending on the outcome of the coming election, the Department of Labor may appeal this ruling. But for now, employees can feel more secure in their ability to obtain relief in situations like those above. Contractors and corporations are often found responsible for permitting—i.e., allowing—the work of temporary and subcontracted employees even if they do not directly instruct them on their daily activities, determine their pay rate, maintain their personnel files, or make ultimate employment decisions.