After decades of controversy, the U.S. Department of Labor issued final rules earlier this year explaining when two companies are joint employers for purposes of federal labor laws, such as wage and hour and unionization statutes. Last week, a federal district court in New York agreed with a group of state attorneys general who sued, claiming that the rule was inconsistent with the definitions of covered employers under those laws.

Prior to the final rule, DOL had taken a fairly expansive reading of covered employers. They included not only the W-2 employer but also other entities that had the ability to exercise control over terms and conditions of employment. Most importantly, this law was used by employees of franchisees to sue the franchisors for alleged violation of wage payment and other laws.

The 2020 final rule restricted the definition of joint employer to an entity that actually exercises control over things like hiring and firing, scheduling, and wage rates and methods of payment. This definition basically removed franchisors from liability for labor law violations, even in situations where the franchise agreement gave the franchisor potential control over certain of these factors.

The district court concluded that under federal labor law, an entity either is an employer or is not. Courts may make this determination using traditional notions of employment, even if the alleged employer has not opted to exercise actual control over such work practices. DOL will likely appeal the district court’s decision, and for now, its prohibition only extends to employers in the Southern District of New York. However, this decision may portend similar conclusions from other federal courts.