New York Federal Court Partially Invalidates U.S. Department of Labor’s Joint Employer Regulation

In Short

The Situation: Seventeen states and the District of Columbia filed suit in the Southern District of New York seeking declaratory and injunctive relief against the U.S. Department of Labor's ("DOL") new joint employer regulation that went into effect in March 2020. 

The Result: A New York federal district court vacated the DOL's test for "vertical" joint employment, finding it contrary to law and arbitrary and capricious in violation of the Administrative Procedure Act ("APA").

Looking Ahead: Employers should be cautious to rely on the DOL's "vertical" joint employment definition when structuring their relationships.

On September 8, 2020, the United States District Court for the Southern District of New York partially invalidated the DOL's new joint employment regulation (29 C.F.R. Part 791), finding that the portion of the regulation addressing "vertical" joint employment was invalid and in violation of the APA.

The DOL's New Joint Employer Regulation

As background, the DOL's joint employer regulation—which took effect in March 2020—defined two categories of joint employment under the Fair Labor Standards Act ("FLSA"): vertical and horizontal. The first category, "vertical" joint employment, concerns an employer who suffers, permits, or otherwise employs an employee to work, but another person simultaneously benefits from that work. In this scenario, the regulation provides that "[t]he other person is the employee's joint employer only if that person is acting directly or indirectly in the interest of the employer in relation to the employee." 29 C.F.R. § 791.2(a)(1).

The regulation provides a four-part balancing test to evaluate vertical joint employment relationships, which requires an evaluation of whether the putative joint employer: (i) hires or fires the employee; (ii) supervises and controls the employee's work schedules or conditions of employment; (iii) determines the employee's rate and method of payment; and (iv) maintains the employee's employment records. The regulation also provides various interpretive rules for evaluating "vertical" joint employment relationships, and identifies certain factors that should be excluded from consideration in the joint employer analysis.

The second category, "horizontal" joint employment, relates to an employer who employs a worker for one set of hours in a workweek, and another employer that employs the same worker for a separate set of hours in the same workweek. 29 C.F.R. § 791.2(e). Per the regulation, if the employers are acting independently of each other and are disassociated with one another with respect to the employee, they are not joint employers. However, if the employers are sufficiently associated with respect to the employment of the employee, they are joint employers.

The States' Challenge & the Court's Decision

Shortly before the rule took effect, 17 states and the District of Columbia sought declaratory and injunctive relief against the rule under the APA. See, e.g., New York v. Scalia, No. 1:20-cv-1689-GHW (S.D.N.Y. Sept. 8, 2020). On September 8, the Court granted the states' motion for summary judgment in part, vacating the rule's test for "vertical" joint employment while preserving its test for "horizontal" joint employment. The Court held that the vertical joint employment test violated the APA as (i) contrary to law; and (ii) arbitrary and capricious. As to each theory, the Court reasoned, in relevant part:

Contrary to Law

  • The DOL interpretation was flawed because it was based only on the FLSA's definition of "employer," while it should have been based on the FLSA's definition of "employee," "employer," and "employ." The Court noted that all three FLSA definitions are an expansive definition that defines the employment relationship based on the economic dependence of the worker;
  • The regulation improperly uses separate tests for determining a "primary employer" and a "joint employer" under the FLSA, and those tests should either be the same, or the DOL should have more clearly explained its rationale for departing from its historical position;
  • The regulation too narrowly interprets the FLSA's "suffer or permit to work" definition in defining a joint employer, including by relying on the common law standard for employment in defining joint employment because the FLSA must be read more broadly; and 
  • The regulation improperly defines certain factors as irrelevant to the joint employment inquiry, including certain economic dependence factors that should be considered in the analysis.

Arbitrary and Capricious 

  • The DOL failed to provide an explanation for the departure from its prior interpretations, (although the Court recognized that the DOL explained the interest in creating a more uniform analysis for determining joint employment);
  • The joint employer regulation conflicted with regulations regarding migrant workers under the Migrant and Seasonal Agricultural Workers Protection Act, which incorporates the FLSA definition of "employ"; and
  • The DOL did not sufficiently consider the potential cost to workers, despite the fact that the DOL acknowledged that the joint employer regulation would result in fewer findings of joint employment.

Jennifer W. Plagman and Katelyn E. Nicasio, associates in the Chicago Office, assisted with the preparation of this Commentary.

Three Key Takeaways

  1. Employers who are relying on the DOL joint employer regulation's definition of "vertical" joint employment to structure their relationships or evaluate potential liability as a joint employer must now factor in the court's decision.
  2. At this time, however, it is unclear how broadly the court's decision will reach. The court did not delineate the scope of its order, so while it is clear the decision applies to employers in the Southern District of New York, it is less clear if it applies to a broader population such as employers in the 17 states and District of Columbia that filed suit or nationwide. The decision may be appealed to the Second Circuit Court of Appeals or the DOL may try to revise its regulation to address the court's concerns.
  3. Employers for whom this decision will have the greatest impact—e.g., franchisors, contractors, staffing companies—should pay close attention to how courts and the DOL react to the decision and remain in close contact with their labor and employment counsel.
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