Judge Gregory Woods of the US District Court for the Southern District of New York struck down a narrowing of the standard of “joint employer” by the Department of Labor (DOL) this Tuesday. The lawsuit was filed by the attorneys general of 17 states and Washington, DC, who argued that the narrowing of the standard would eliminate important labor protections for workers. Led by New York and Pennsylvania, the states said the DOL’s rule would make it harder to hold companies liable for violations by franchisees and contractors of minimum wage and overtime laws.

The DOL’s attempt at narrowing the standard was seen as business-friendly and anti-labor. Employers who have franchise relationships or rely on subcontractors, in particular, benefited from the standard.

Here is an example of vertical joint employment. Imagine that an employee works for a contractor. A corporation hires the contractor. The contractor fails to pay the employee the minimum wage… If the contractor and the corporation are the employee’s joint employers, the employee can sue both the contractor and the corporation for back wages. In other words, the contractor and the corporation are both on the hook for the employee’s damages. But if the contractor and the corporation are separate employers, then the employee can sue only the contractor. 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 contractor goes bankrupt. If the corporation is her joint employer, the employee can still recover. If not, the employee is out of luck.

Judge Woods said the rule was “arbitrary and capricious” because the DOL failed to justify it or account for its costs to workers, which the states estimated at more than $1 billion annually. The judge also ruled that the Trump administration’s changes to the longstanding, 80-year-old joint employer doctrine were too narrow, requiring that a company actually exercise control in the workplace instead of simply having the right to exercise control. 

This case follows an ongoing trend of expanding the definition of “employee,” while limiting big businesses that depend heavily on independent contractors and franchisees.

Under the revised rule, companies would be treated as joint employers of franchises and contract workers if they set their pay and controlled hiring and firing processes, among other factors.