Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D.D.C.: Labor Department’s third-party domestic service employer regulation vacated in action by IFA and others, (Dec 23, 2014)

By Ronald Miller, J.D.

In a challenge by the International Franchise Association (IFA) and two trade associations, the Department of Labor’s (DOL) third party employer regulation, scheduled to go into effect on January 1, 2015, was vacated by the federal district court in the District of Columbia. In agreement with the plaintiffs, the district court concluded that the exemption enjoyed by third-party employers of domestic service workers over the past 40 years is not an open question, and the DOL cannot manipulate its definitional authority in such a way as to effectively rewrite the exemption out of the law (Home Care Association of America v. Weil, December 22, 2014, Leon, R.).

For over 40 years, Congress has exempted third-party providers of home care services from having to pay minimum wage or overtime pay to those employees who provided domestic companionship services to seniors and individuals with disabilities, or to pay overtime wages to live-in domestic service employees. On October 1, 2013, the DOL issued a new regulation that did away with these longstanding exemptions. In response, the IFA and others brought suit challenging the regulation as an arbitrary and capricious exercise of authority inconsistent with Congress’ language and intent.

Before the court was a motion for partial summary judgment by the plaintiffs with respect to the new third party regulation and the DOL’s motion to dismiss the action, or alternatively for summary judgment.

Domestic service employment. At the time that it expanded Fair Labor Standards Amendments (FLSA) coverage to domestic service employees in 1974, Congress included exemptions tied to certain types of domestic service work. Specifically, the statute stated that the FLSA’s overtime and minimum wage requirements would not apply to “any employee employed in domestic service employment to provide companionship services for individuals who (because of age or infirmity) are unable to care for themselves” (companionship services exemption). It further stated that the FLSA’s overtime requirements shall not apply to “any employee who is employed in domestic service in a household and who resides in such household” (live-in domestic employee exemption).

Following passage of the 1974 Amendments, DOL promulgated implementing regulations. Those regulations focused on the employees and the nature of the employees’ services. The term “domestic service employment” refers to services of a household nature performed by an employee in or about a private home of the person by whom he or she is employed. “Companionship services” means “those services which provide fellowship, care, and protection for a person who, because of advanced age or physical or mental infirmity, cannot care for his or her own needs.” Finally, “live-in” workers are described as “domestic service employees who reside in the household where they are employed.”

Companionship services exemption. The regulations further specify that the exemptions cover companions and live-in domestic service workers who are “employed by an employer or agency other than the family or household using the services.” In Long Island Care at Home, Ltd. v. Coke, the Supreme Court heard a challenge to the validity of the long-standing inclusion of employees paid by third parties within the companionship services exemption, with the Court concluding that the third party rule was valid and binding. Subsequent bills introduced in Congress seeking to abolish this exemption failed. “Undaunted by the Supreme Court’s decision in Coke, and the utter lack of Congressional support to withdraw this exemption, the Department of Labor amazingly decided to try to do administratively what others had failed to achieve in either the Judiciary or the Congress.”

Agency deference fails. As an initial matter, the association argued that the new rule conflicts with plain language and legislative history of the FLSA. The DOL countered that the new regulation is entitled to deference because it was promulgated pursuant to the department’s rulemaking authority in this area and reflects a reasonable interpretation of the statute. Here, the court analyzed the association’s challenge to the validity of the DOL rule under the two-step analytical framework laid out in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. However, the court found that it need not get to a Step II analysis in this case.

The essence of the first stage of the court’s inquiry was what questions Congress already answered, and what questions Congress left up to DOL to answer. In view of the plain language of the FLSA, DOL could not argue that the statutory text required a regulation that effectively excludes those workers employed by third parties from the exemption. Instead, it rested its argument on delegated definitional authority and general implementation authority to answer what it considers to be open questions left by Congress. Here, the court determined that the exemption enjoyed by third-party employers over the past 40 years is not an open question, and the DOL cannot manipulate its definitional authority in such a way as to effectively rewrite the exemption out of the law.

The FLSA and its amendments undoubtedly envisioned that DOL would play some role in implementing the statutory scheme. In fact, the companionship exemption itself directs the Secretary of Labor to “define and delimit” the statutory terms in the exemption. Further, the 1974 Amendments authorize the Secretary in a general sense “to prescribe necessary rules, regulations, and orders with regard to the amendments made by this Act.” However, the agency’s general rulemaking authority did not necessarily mean that every specific rule the agency promulgates will be a valid exercise of that authority.

Congress merely left a number of definitional gaps in the exemptions’ statutory language, and the DOL had appropriately filled those gaps through regulations. Once those definitional gaps were filled, however, the statutory loop was closed. There is no explicit—or implicit—delegation of authority to the agency to parse groups of employees based on the nature of their employer who otherwise fall within those definitions. Where Congress wanted to draw a line based on the circumstances surrounding an employee’s employment rather than the type of services the employee provides, it did so. Congress was concerned with what services employees were providing, not whether money was routed through a third party on its way to the employee from the individual or family requiring assistance.

Here, Congress had directed the DOL to define statutory terms, and include “any employee” who provides services according to those definitions within the scope of the exemptions. The focus was on the type of the services provided, not who paid the check. As such, Congress had clearly spoken on this issue, and the DOL’s new, conflicting rule could not survive, concluded the court. Accordingly, the DOL’s Third Party Employer regulation was vacated.

In response to the court ruling, Robert Cresanti, IFA Executive Vice-President of Government Relations & Public Policy noted, “Earlier this year, the IFA united with the Home Care Association of America and the National Association for Home Care and Hospice to fight yet another example of regulatory overreach of power by the U.S. Department of Labor. By promulgating regulations to eliminate the overtime exemption for companion care workers, the administration threatened affordable care for seniors and the disabled and put many franchise small businesses and their employees in jeopardy by subjecting them to potentially unsustainable costs. Today’s victory is a small but important step in protecting clients, workers and local franchise business owners in the home care industry.”

The case is No. 14-cv-967 (RJL).

Attorneys: Maurice Baskin (Littler Mendelson), and William Alexander Dombi (Center for Health Care Law) for Home Care Association of America, International Franchise Association, and National Association for Home Care & Hospice. Julie Shana Saltman, U.S. Department of Justice, for David Weil, Thomas E. Perez, and U.S. Department of Labor.

Companies: Home Care Association of America; International Franchise Association; National Association for Home Care & Hospice

Cases: FranchisingDistribution DistrictofColumbiaNews