On Tuesday, a federal judge in Manhattan shot down parts of the Trump administration’s recent joint employer regulation, now making it easier for employees to prove joint employment and obtain recovery for wage and hour violations against multiple companies. The decision is a setback for the business community and Republican initiatives at the U.S. Department of Labor.

Earlier this year, the DOL issued a final rule that narrowed the definition of joint employment under the Fair Labor Standards Act. The final rule reversed course from a 2016 Obama era rule that defined joint employment expansively and permitted some employees to collect unpaid wages from multiple employers in the context of “vertical joint employment.” Vertical joint employment exists where an employee has an employment relationship with one employer (typically a staffing agency, subcontractor, labor provider, or other intermediary employer), but the employee is actually economically dependent on, and thus employed by, another entity involved in the work. Vertical joint employment often arises in the context of franchise models.

This year’s final rule clarified that joint employment could only exist where both entities exercise actual control over employees, instead of just reserving the right to exercise such control. The test also adopted a four-factor balancing test to analyze joint employment. Under this test, a joint employer must have the right to take some or all of the following actions: (i) hire or fire the employee; (ii) supervise and control the employee’s work schedule or conditions of employment to a substantial degree; (iii) determine the employee’s rate and method of payment; and (iv) maintain the employee’s employment records. 29 C.F.R. § 791.2(a)(1)(i)-(iv).

The final rule rendered irrelevant to the joint employer inquiry “certain business models (such as a franchise model), certain business practices (such as allowing the operation of a store on one’s premises), and certain contractual agreements (such as requiring a party in a contract to institute sexual harassment policies).”

In striking down the final rule, the judge ruled in favor of the 17 states and the District of Columbia who sued the administration in February to block the final rule. The court explained the rule violated federal rulemaking norms under the Administrative Procedure Act because it “ignores the [FLSA’s] broad definitions” and the DOL “failed to adequately justify its departure from its prior interpretations and to account for some of the final rule’s important costs.”

In light of the ruling, employers should evaluate their wage and hour compliance in the context of potential joint employment relationships. Companies in the staffing or contracting industries, or those with a franchise model in any industry, should take particular care to review compliance.