By Gerald L. Maatman, Jr., Jennifer A. Riley, and Gregory Tsonis
Duane Morris Takeaways: In a consequential ruling on March 11, 2024, Judge Thomas M. Durkin of the U.S. District Court for the Northern District of Illinois granted in part and denied in part a motion for a preliminary injunction concerning amendments to the Illinois Day and Temporary Labor Services Act (“DTLSA”) in Staffing Services Association of Illinois et al. v. Flanagan, Case No. 23-CV-16208 (N.D. Ill. Mar. 11, 2023). The ruling is significant as it enjoins enforcement of the DTLSA provision requiring staffing agencies to provide equivalent benefits as directly-hired, comparable client company employees. The decision does not, however, affect the DTLSA requirement that staffing agencies provide equal wages after 90 days of work at a client. However, this opinion and order indicates that the DTLSA’s equal benefits requirement – considered by many to be the most onerous portion of the recent DTLSA amendments – appears likely to be preempted by the Employment Retirement Income Security Act (“ERISA”) and may never go into effect at all.
Background
In May 2023, the Illinois General Assembly amended the DTLSA to include several new and significant provisions, which Governor Pritzker signed into law on August 4, 2023. See 820 ILCS 175/et seq. Section 42 of the amended DTLSA, titled “Equal Pay for Equal Work,” included the obligation that staffing companies pay temporary workers that work more than 90 days within a twelve-month period at a client company the same wages and “equivalent benefits” as the lowest paid, comparable, directly-hired employee at the client company. Staffing agencies also could opt to pay the “hourly cash equivalent” of benefits owed under the law. Section 42 also imposed information-sharing requirements on third-party companies utilizing temporary workers, requiring them to provide staffing agencies with “all necessary information related to job duties, pay, and benefits of directly hired employees” to facilitate compliance by staffing agencies.
The amended DTLSA also required staffing agencies to disclose to temporary workers prior to the start of any assignment whether the work site was experiencing any “strike, lockout, or other labor trouble” and gave the worker the right to refuse the assignment without prejudice to receiving another assignment. See 820 ILCS 175/11. Section 67 of the DTLSA includes a private right of action, allowing “interested parties” to bring actions against staffing agencies or their company clients for violations of the DTLSA. An “interested party” is defined in the Act as “an organization that monitors or is attentive to compliance with public or worker safety laws, wage and hour requirements, or other statutory requirements.” See 820 ILCS 175/5, 67. A comprehensive breakdown of the 2023 amendments to the DTLSA and the law’s significant new requirements can be found here.
The Illinois Department of Labor published emergency rules and proposed final rules in August 2023. The emergency rules expired on January 4, 2024, and the proposed final rules remain pending. Further legislation in November 2023 delayed the start of the 90-day calculation period necessary to trigger the equal pay and benefits provision in Section 42 the DTLSA until April 1, 2024.
In December 2023, the Staffing Services Association of Illinois, the American Staffing Association, and three staffing agencies brought suit in federal court against the director of the Illinois Department of Labor (“IDOL”) and sought a preliminary injunction preventing the enforcement of §§ 11, 42, and 67 of the amended DTLSA and related regulations. On February 7, 2024, the Court held a hearing on the motion and heard testimony from the three plaintiff staffing agencies.
The Court’s Decision
The Court’s opinion first summarized the relevant provisions of the DTLSA and relief sought by the plaintiffs. The Court noted that the plaintiffs did not challenge the equal wage requirement in § 42 of the DTLSA. Id. at 2 n.1. As to the DTLSA regulations, the Court denied plaintiffs’ motion for an injunction against the emergency rules in light of their January 2024 expiration, and further declined to enjoin the proposed final DTLSA rules that plaintiffs sought to enjoin given that they were subject to and likely to change.
To grant a preliminary injunction, the Court noted that plaintiffs must establish that they are likely to succeed on the merits, are likely to suffer irreparable harm absent an injunction, and that the balance of equities tip in their favor and that an injunction is in the public interest. Turning to § 42 of the DTLSA, the Court began its analysis by assessing plaintiffs’ likelihood of success on the merits. Noting that the ERISA preempts laws that “require providers to structure benefit plans in particular ways,” id. at 5, the Court ultimately concluded that plaintiffs’ argument that the ERISA preempts the DTLSA provision is likely to succeed. The Court reasoned that the “equivalent benefits” provision forces agencies to “determine the value of many different benefit plans and then determine whether to provide the value in cash or the benefits themselves by modifying their plans or adopting new ones,” which prohibits a staffing agency in its “ability to administer ERISA plans uniformly.” Id. at 7. The Court also rejected the IDOL’s argument that the option to pay the cash value of benefits avoids preemption by the ERISA, noting that for staffing agencies with employee working in different states, § 42 “denies agencies the ability to administer its ERISA plans uniformly” and even the cash option “requires agencies to make judgment calls about employees’ eligibility and level of benefits on an individualized and ongoing basis.” Id. at 8.
Having found that plaintiffs are likely to succeed on the merits as to the “equivalent benefits” provision, the Court turned to the analysis of irreparable harm from § 42. The Court noted the clear “expense and burden of determining the relevant values of benefits and creating, selecting, modifying, or supplementing existing ERISA plans or paying the difference” that staffing agencies would be forced to incur. Id. at 18. Additionally, the Court credited evidence offered by the staffing agencies of reduced revenue, lost clients, and the administrative burdens that would force one staffing agency to cease doing business altogether. Id. As a result, the Court found that staffing agencies had demonstrated far more than the “mere possibility” of irreparable harm to support an injunction. Id. at 20.
Finally, the Court evaluated the balance of the equities and public interest and concluded that plaintiffs’ showing that they are likely to succeed on the merits and the irreparable harm that would result from § 42 outweighed the IDOL’s goal of ending “permatemping,” or the long-term hiring of temporary workers without offering them a permanent position with corresponding wages and benefits of directly-hired employees. Id. at 21.
Notably, the staffing agency plaintiffs also sought to invalidate the portion of § 42 of the DTLSA requiring client companies to disclose pay and benefit data. The Court held that the plaintiffs lacked standing to assert that challenge. However, it observed in a footnote that “[t]he challenge to this part of Section 42 should come from the agencies’ third-party clients.” Id. at 5 n.3.
Next, the Court analyzed plaintiffs’ challenge to § 11 of the DTLSA, which requires staffing agencies to disclose to temporary workers prior to beginning an assignment of any “strike, lockout, or other labor trouble” at a client site. Id. at 11. The staffing entity plaintiffs argued that the provision is preempted by the National Labor Relations Act (“NLRA”) and applicable U.S. Supreme Court precedent interpreting the NLRA. Ultimately, the Court disagreed, holding that § 11 of the DTLSA regulates disclosure and work assignments, given the employee’s right to refuse the assignment, while the relevant section of the NLRA protects an employee’s right to “join, or assist labor organizations; collectively bargain through a representative of the employee’s choosing; engage in concerted activity, e.g., striking or picketing; or refrain from engaging in such activities.” Id. at 12-13. That § 11 of the DTLSA and the rights protected by the NLRA “might arise in the same setting,” the Court concluded, does not mean that § 11 is precluded outright. Id. at 14. The Court similarly rejected plaintiffs’ argument that the right to hire replacement workers is an “economic weapon” afforded by the NLRA, which the DTLSA curtails through the right of refusal, reasoning that the DTLSA “merely requires agencies to give their employees information about a potential work site and the right to an alternative assignment.” Id. at 15.
Finally, the Court analyzed plaintiffs’ contention that § 67 of the DTLSA, which gives a private right of action to any “interested party,” violates constitutional due process guarantees because the “interested party” may not be injured by any violation. The Court noted the existence of other statutes giving private rights of action to interested parties, ultimately concluding that plaintiffs’ argument is one of standing, which the Court declined to address in a hypothetical scenario. Id. at 17.
Implications For Employers
This decision is hugely consequential for both staffing agencies and the companies that use them.
The ongoing coordination and information-sharing regime envisioned by the DTLSA concerning employee benefits is unprecedented, and was the source of significant concern for staffing agencies and third-party company clients alike. This Court’s ruling not only prevents enforcement of the “equivalent benefits” requirement of the DTLSA indefinitely, but also indicates that the benefits provision in § 42 of the DTLSA is unlikely to survive at all. Though technically unaffected by this decision, the § 42 requirement requiring companies to disclose benefit-related data may await a similar fate if and when a challenge by a staffing company client is brought. While undoubtedly litigation over the DTLSA will continue, including possibly an appeal of the Court’s opinion and order, this decision prevents the application of the most onerous provision in the DTLSA and the imposition of a burdensome administrative regime on staffing agencies and their clients for at least the foreseeable future.