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On September 8, 2020, Judge Gregory Woods in the United States District Court for the Southern District of New York struck down the majority of the U.S. Department of Labor’s (DOL) “joint-employer” rule concerning what it takes to be considered a joint employer under the Fair Labor Standards Act (FLSA). The decision has a significant impact on both government contractors and other employers who have “vertical” employment relationships by making them more susceptible to lawsuits from a subcontractor’s employees.

The DOL developed a “joint-employer” rule, issued in January 2020 and effective in March 2020, which imposed a four factor balancing test to decide whether a worker can hold two or more linked businesses liable for the same FLSA violation. The DOL Rule focused on control and looked to whether a potential joint employer: (1) hires or fires the employee; (2) supervises and controls the employee’s work schedule or conditions to a substantial degree; (3) determines the employee’s rate and method of payment; and (4) maintains the employee’s employment records. The practical effect of the DOL Rule was that it narrowed the scenarios in which multiple employers could be liable to the same employee.

New York and 17 other states sued to block the DOL Rule, based in part on concerns that workers would be subject to wage theft in violation of the FLSA. Judge Woods concurred, holding that the DOL Rule conflicted with the FLSA’s plain text with regard to what it means to “employ” a worker. The FLSA provides that to “employ” a worker is to “suffer or permit” them to work. The DOL Rule, conversely, was predicated on the definition of employer as “any person acting directly or indirectly in the interest of an employer in relation to an employee” and effectively provided that the broader definition of “employ” is irrelevant for joint employers. Judge Woods stated that these definitions are interrelated and the DOL cannot square its rule with the FLSA’s “suffer or permit” language. By conflicting with a statute, the DOL Rule violated the Administrative Procedure Act and, accordingly, Judge Woods struck down all portions of the DOL Rule that were contrary to the FLSA.

Importantly, Judge Woods vacated the portion of the DOL Rule that applied to “vertical” employment relationships, where workers for an intermediary company are contracted to another company. This will have a notable impact in the government contracts context, where such an employment relationship is common. For example, a prime contractor who has a contract to sell specialized military training equipment might subcontract with a company to provide on-site technical support to build the equipment. Under the DOL Rule, the prime contractor would only be liable as a joint employer for claims made by the subcontractor’s workers if the prime contractor exercised control over those workers. Following Judge Woods’ opinion, the prime contractor may be liable as a joint employer even if it does not exercise control over the subcontractor’s workers so long as it “suffer[s] or permit[s]” them to work.

Judge Woods did not vacate the portion of the DOL Rule applying to “horizontal” relationships, where a worker is employed by two “sufficiently associated” businesses. In general, a horizontal relationship occurs when one employer employs an employee for one set of hours in a workweek and another employer employs the same employee for a separate set of hours in the same workweek. Such “horizontal” relationships where the two businesses both employ or share control over a single employee are still subject to the DOL Rule.

Government contractors who may be engaged in “vertical” subcontractor relationships should exercise caution with regard to their policies and agreements with subcontractors. Government contractors who altered their policies and agreements with subcontractors in response to the DOL Rule should be especially careful, as this SDNY decision likely opens them up to increased liability.