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Labor Department’s joint employer rule may stem lawsuits

Posted On: Jan. 20, 2020 3:40 PM CST

Labor Department’s joint employer rule may stem lawsuits

The joint employer rule issued by the U.S. Department of Labor last week could reduce litigation filed against employers, but much will depend on how courts react, say experts.

Many attorneys who represent employers say the rule, which goes into effect March 16, will help employers, but an official of an organization that advocates for workers said it will make it easier for employers to act irresponsibly toward employees.

The rule applies to situations where more than one employer may be involved in a worker’s employment, such as with staffing agencies, subcontractors and franchise operations, and is based on the Fair Labor Standards Act, which requires employers to pay at least the federal minimum wage for hours worked and overtime for hours worked over 40 a week.

If considered a joint employer, an organization that, for example, uses a staffing agency’s services, may be subject to litigation and exposed to liability if the staffing agency failed to pay employees correctly.

The U.S. Equal Employment Opportunity Commission and the National Labor Relations Board are expected to issue comparable final rulings on the issue as well.

The Labor Department rule finalizes the four-factor “balancing test” that was first proposed in April.

The department had announced in April it was withdrawing the Obama administration’s joint employment and independent contractors’ guidance, which had expanded the definition of employers.

The balancing test in the final rule examines whether potential joint employers hire or fire an employee, supervise and control an employee’s work schedule or condition of employment to a substantial degree, determine an employee’s rate and method of payment, and maintains an employee’s records.

In the statement announcing the final rule, Secretary of Labor Eugene Scalia said the rule “furthers President Trump’s successful, government-wide effort to address regulations that hinder the American economy and to promote economic growth.”

“The rule really relaxes the standards for finding joint employer status, which had been the subject of the Obama Administration’s administrative interpretation,” said Fiona W. Ong, a partner with Shawe Rosenthal LLP in Baltimore, who represents employers.

“That interpretation applied an economic realities test in which it admittedly said almost all individuals would be found to be employees,” she said.

The new rule sets a more “thoughtful assessment of joint employee status,” Ms. Ong said, and provides relief to franchisors or staffing agencies where “there was a real risk that, under the old standard, the host employer would have been found to be a joint employer,” she said.

Daniel B. Pasternak, a partner with Squire Patton Boggs in Phoenix, who works with employers, said that in the past it had been argued that if a business, for example, requires workers to adhere to certain quality standards, or provides a sample of an employer handbook, it can be considered a joint employer.

The new rule “unwinds that and says that doesn’t make joint employer status more or less likely, and the primary consideration is control,” whether direct or indirect, he said.

But courts will have the final word, say observers.

The Labor Department took a pragmatic approach and “to the extent judges are receptive to pragmatism, then it’s got a good chance of being endorsed in the federal courts,” said Eric B. Meyer, a partner with FisherBroyles LLP in Philadelphia, who represents employers.

“Whether it reduces litigation, that remains to be seen,” Mr. Pasternak said. A rule approved by the department is “just a rule, not law,” and courts will determine whether they defer to the rule, he said.

The rule is “a qualified positive for employers,” said Marty Heller, of counsel with Fisher & Phillips LLP in Atlanta, who represents employers. “It’s good, but it’s not great.”

Ambiguities that remain in the rule will likely lead to more lawsuits to clarify the rule, he said.

“The courts may or may not follow that,” said Todd J. Lebowitz, a partner with Baker Hostetler in Cleveland, who specializes in joint employment issues and independent contractor misclassification disputes. “This is definitely good news for businesses that use other companies’ employees to perform services, but it’s of limited use” and more litigation will follow, he said.

So long as employees “feel wronged, they’re going to look to somebody else to help remedy that, whether it’s their direct employer, or a different company,” Mr. Lebowitz said.

But courts usually give deference to well-reasoned regulations, said Richard Reibstein, a partner with Locke Lord LLP in New York ,who represents employers and senior management in labor and employment law issues.

“And these appear to have been extremely thoughtful and took into account the views of stakeholders on every side of the legal question,” he said.

The rule will make it easier for employers not to be responsible for workers, said Catherine Ruckelshaus, legal director and general counsel for the New York-based National Employment Law Project, which advocates for workers.

“This is a complete reversal and narrowing” of the Obama administration’s guidance and is “causing a lot of confusion in the courts,” she said. “We see it as contrary to the law,” and not worthy of deference, she said.

Observers say the anticipated EEOC rule on the joint employment issue would be based on the provisions of the Civil Rights Act of 1964, while the NLRB rule would be based on the National Labor Relations Act.

In these cases, too, the agencies are expected to retract from the Obama administration’s policy, observers say.