Department of Labor Rescinds Narrow Definition of Joint Employer

    Franchisors are more likely to have liability in labor violations. 

    Red tray with Fast Food menu is on the table in the restaurant.
    Adobe Stock
    The Department of Labor noted that the rescinded rule included descriptions of a joint employer that were contrary to statutory language and Congressional intent and that it failed to take into account prior guidance.

    In an effort to improve workers' rights, the Department of Labor announced Thursday that it has formally removed a Trump-era rule that narrowed definition of a joint employer.

    The rule, which went into effect in March 2020 and will officially end September 28, used a four-factor test to determine joint-employer status: Hires or fires the employee, supervises and controls the employee’s work schedule or conditions of employment to a substantial degree, determines the employee’s rate and method of payment, and maintains the employee’s employment records. Also, it noted that "economic dependence" on a potential joint employer does not determine joint-employer status and that a franchisor model does not make joint-employer status more or less likely. 

    With this limited scope, franchisors were less likely to be described as a joint-employer, which reduced their liability when it came to lawsuits at the franchisee level. 

    However, the Department of Labor noted that the rescinded rule included descriptions of a joint-employer that were contrary to statutory language and Congressional intent and that it failed to take into account prior guidance. The U.S. District Court for the Southern District of New York vacated most of the rule in 2020 following a lawsuit from New York Attorney General Letitia James, Pennsylvania Attorney General Josh Shapiro , and more than a dozen other states. U.S. District Court Judge Gregory Woods said in a September 2020 opinion that the rule conflicted with the Fair Labor Standards Act. He also referred to the rule as “arbitrary and capricious” because it failed to explain why the Department of Labor deviated from prior guidance or why it didn't consider the effect on workers.

    The Department of Labor explained that under the Fair Labor Standards Act, an employee can have more than one employer for the work they perform. Joint employment applies when—for the purposes of minimum wage and overtime requirements—the department considers two separate companies an employer for the same work. The department used an example of when a hotel contracts with a staffing agency to provide a cleaning staff, which the hotel directly controls. If the agency and the hotel are joint employers, that means they're both responsible for worker protections. 

    The department said a strong joint employer standard is critical because responsibilities and liability under the Fair Labor Standards Act don't apply to a business that doesn't meet the definition of employer. 

    “Joint employment is part of our longstanding federal labor laws,” said Wage and Hour Division Acting Administrator Jessica Looman in a statement. “The U.S. Department of Labor’s Wage and Hour Division will continue to follow the law and judicial precedent when evaluating joint employer relationships to enforce worker protections.”

    Franchisors have previously argued that an expanded definition of joint employer could impede growth, increase lawsuits, and require them to be more heavy-handed in store-level practices, like hiring and recruitment. The International Franchise Association expressed disappointment in the new rule and said the expanded joint-employer standard would "place a cloud of uncertainty over the heads of local small business owners that are trying to lead this economic recovery."

    "The joint employer standard released in 2020 helped small business owners navigate the crisis, keep employees safe, and protect their communities during the COVID-19 pandemic," the organization said in a statement. "Moreover, the 2020 standard also ensured brands could leverage their networks to assist small business owners in navigating the Paycheck Protection Program (PPP) and other critical emergency lending measures.

    "Franchises share the same values as this administration and are committed to addressing inequities in our economy and society," it added. "Nearly one-third of franchises are owned by people of color, a higher ownership rate than non-franchised small businesses. An expanded joint employer standard will be responsible for the dissolution of small business owners' equity and the closing of an inclusive route to generational wealth for those historically locked out of the entrepreneurial marketplace.”