The U.S. Department of Labor’s “joint employer” rule was invalidated in large part on Tuesday, with a federal judge saying that the rule unlawfully narrowed the standard determining when companies may have minimum wage and overtime pay obligations for particular workers, including temporary workers or contractors.

The Labor Department had announced the rule in January, and it became effective in March.

The rule updated Obama-era regulations interpreting joint employer status under the Fair Labor Standards Act, which requires covered employers to pay their employees at least the federal minimum wage for every hour worked and overtime for every hour worked over 40 in a workweek.

The joint employment standard determines when more than one employer is responsible under the FLSA because both exert sufficient influence over a worker’s employment. The rule that became effective in March contained a four-factor “balancing test” meant to help determine FLSA joint employer status. The test considered whether the potential joint employer had the power to:

  • hire or fire the employee;
  • supervise and control the employee’s work schedule or conditions of employment to a substantial degree;
  • determine the employee’s rate and method of payment; and
  • maintain the employee’s employment records.

Judge Gregory H. Woods of the U.S. District Court for the Southern District of New York ruled Tuesday that the test is “impermissibly narrow.”

“To be clear, all agree that the Final Rule’s four factors can be relevant to the joint employer
inquiry. Indeed, the four factors may constitute sufficient conditions for joint employer status,” Woods wrote. “But the Final Rule says that a joint employer ‘must actually exercise — directly or indirectly — one or more of the four control factors.’ In other words, the conclusion that an employer satisfies ‘one or more of the control factors’ is a necessary condition for an entity to qualify as a joint employer. That conflicts with the FLSA.”

The Labor Department’s interpretation of vertical joint employer liability, including as related to staffing agencies and subcontractors, Woods also said, was “arbitrary and capricious.”

The ruling came in the case of New York et al v Scalia et al., brought in February by New York Attorney General Letitia James, Pennsylvania Attorney General Josh Shapiro and 16 other attorneys general. In challenging the rule, they argued that it would impose significant regulatory burdens on states and would harm states’ economies and residents. The Economic Policy Institute estimated that the rule would cost workers more than $1 billion annually, Woods noted.

“Today’s ruling is a critical win for the many American workers who would experience wage theft or a decrease in income due to this reckless rule,” James said in a statement. “As our country continues to face the economic impacts of the COVID-19 crisis, we cannot allow lower- and middle-income workers to be put at an even greater financial disadvantage.” 

A Labor Department spokesman told Bloomberg, “The Department is disappointed in the decision and will review and evaluate our options with the Department of Justice.”