Federal Court Decision on Joint Employer Rule a Win for Temp Workers

Laura Padin

Blog September 28, 2020

This month, a federal court in New York struck down the heart of the U.S. Department of Labor’s controversial new rule defining who is an employer under the Fair Labor Standards Act (FLSA). [1]The court found that the rule’s definition of when an entity can be considered an employer alongside another employer—a “joint employer”—was too narrow and conflicted with the text and purposes of the FLSA.

The court’s thoughtful decision should restore the FLSA’s intention to hold corporations accountable to their workers for minimum wage, overtime, and child labor protections, regardless of whether those workers are engaged directly by the corporation or through an intermediary labor contractor.

What is a joint employer?

U.S. labor and employment laws recognize that more than one entity can be responsible as an employer, even if there is only one “employer of record.” One employer of record means only one entity holds itself out as the employer.

This is important because the FLSA’s very broad definition of “employ”—which includes to “suffer or permit to work”—was designed to reach businesses that used middlemen to illegally hire and supervise children. [2] This is a joint employment scenario.

There was no dispute that the middlemen who directly hired the children were their employer. Under the FLSA, the businesses that contracted with the middlemen were also their employer. Holding more than entity responsible as an employer improves compliance with our labor and employment laws, because companies that outsource their work to intermediaries can be held liable for violations of those laws.

Is temp staffing a joint employer arrangement?

A quintessential example of joint employment arises when corporations use temp staffing agencies to hire their workers. A corporation contracts with a temp staffing agency to hire employees who perform work for the benefit of the corporation. The temp staffing agency is the employer of record.

The central question in the joint employer analysis is whether the corporation is also their employer. If it is their employer, it is jointly and severally liable for the temp workers’ minimum wage, child labor, and overtime violations. As the court said:

If the [staffing agency] and the corporation are the employee’s joint employers, the employee can sue both the [staffing agency] and the corporation for back wages. In other words, the [staffing agency] and the corporation are both on the hook for the employee’s damages. But if the [staffing agency] and the corporation are separate employers, then the employee can sue only the [staffing agency]. Note that the wages due to the employee are the same in either scenario. The joint employment doctrine addresses only from whom the employee may collect damages. Imagine, for example, that the [staffing agency] goes bankrupt. If the corporation is her joint employer, the employee can still recover. If not, the employee is out of luck. [3]

Why does joint employment matter for temp workers?

An important benefit to finding that corporations are the employers of temp workers hired through staffing agencies is that it shifts the balance of power toward agencies with a strong track record of compliance with labor and employment laws.

Corporations that use staffing agencies will be more likely to set up procedures that detect their staffing agencies’ illegal labor practices.

Conversely, when a corporation is not its temp workers’ employer, it can treat these workers as nothing more than a line-item expense in its budget, pit staffing agencies against each other to drive down labor costs, and ignore the illegal labor practices and exploitation that may result.

Partly due to decreased accountability, temp staffing work has increased dramatically in labor-intensive occupations in high-risk industries such as logistics, manufacturing, and construction. This is why increased accountability is critical to improving conditions for temp workers, who toil in a variety of jobs characterized by occupational segregation, low wages, nearly nonexistent benefits, and pervasive illegal conduct.

Black and Latinx workers are overrepresented in temp work, a consequence of reduced access to quality education, limited recruiting networks, and racist hiring practices. Full-time temp workers earn about 40 percent less than permanent direct hires, exacerbating economic insecurity and the wealth gap for communities of color. And staffing agencies consistently rank among the worst large industries for the rate of wage-and-hour violations.

Why did the court strike down part of the 2020 joint employer rule?

On January 12, 2020, the U.S. Department of Labor announced a revised joint employer rule that adopted a new four-factor balancing test for determining whether an entity is an employer. The factors are whether the entity (1) hires or fires the employee; (2) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (3) determines the employee’s rate and method of payment; and (4) maintains the employee’s employment records.

A number of states sued to stop implementation of the new rule. In its September 8, 2020 decision, the district court vacated part of the rule. It rightly found that analysis of these factors alone is too limited an inquiry for determining whether an entity is a joint employer under the FLSA.

The court also found that the test conflicts with both the text and purpose of the FLSA, which must be construed liberally because broad coverage is essential to accomplish its goals. [4] One goal is to root out wage and hour violations by holding “businesses [that] allow work to be done on their behalf” and have the power “to prevent wage and hour abuses responsible, regardless of indirect business relationships or business formalities.” [5]

The temp staffing scenario explains why the Department of Labor’s definition is too narrow. Because staffing agencies are the admitted employer of their temp workers, they typically hire and fire the workers, maintain their employment records, and set the wages and methods of payment. These factors would favor a finding that the contracting corporation is not an employer, even though staffing agencies perform these functions at the behest of the contracting corporation.

More importantly, the four-factor balancing test does not consider other employer functions that the contracting corporation maintains. In the typical temp staffing scenario, temp workers perform work that is integral to the contracting corporation’s business. They perform that work at the corporation’s premises under conditions that the corporation directly or indirectly controls and supervises.

And, even though the staffing agency sets the temp workers’ wages and pays them, those wages are based on the rate set in the contract between the corporation and the staffing agency. Ignoring these aspects of the relationship leads to a superficial and crabbed understanding of who is an employer. It also neglects to address the various ways that temp workers are economically dependent on the corporation that contracts with the staffing agency and how that corporation benefits from their labor.

The Department of Labor already has a good interpretative rule on joint employment. The Obama administration’s 2016 Administrator’s Interpretation surveyed federal Circuit and Supreme Court rulings and described, with modern examples, the wide range of factors that should be analyzed to determine the economic realities of the relationship between an employee and a potential joint employer.

Any guidance must urge factfinders and courts to look below the surface and consider the power dynamics in and economic realities of the relationship between a corporation, its subcontractors, and its subcontracted workers.

Only then will the rule fulfill the FLSA’s purpose to broadly cover employees and employers to root out wage and hour violations regardless of the company’s decision to outsource its work.