In a potential blow to franchisors, a federal judge struck down a U.S. Department of Labor ruling Tuesday that narrowed the liability of franchisors.
The case centers around “joint employer” regulations, which defines when a worker is employed by more than one company under the Fair Labor Standards Act (FLSA).
In January, the DOL issued a four-factor test to determine joint employer status in situations where an employee performs work for one employer that simultaneously benefits another entity or individual: 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.’
In his opinion, U.S. District Court Judge Gregory Woods said the rule conflicted with the FLSA and referred to it as “arbitrary and capricious.” He also wrote that the department didn’t adequately justify its departure from its prior interpretations and account for costs.
“If the Department’s interpretation were “clear” (or even permissible), some court would have probably adopted its rationale,” Woods said in the ruling. “But the Department has found not a one. Over eighty years later, this dog has yet to bark.”
Prior to the new definition, franchisors were more likely to be wrangled into labor violations of their franchisees, even if they didn’t exercise full control. Operators have argued that this model could impede growth and require them to be more heavy-handed in store-level practices, like hiring and recruitment.
Woods’ opinion comes after New York Attorney General Letitia James and Pennsylvania Attorney General Josh Shapiro led a group of 18 states that filed a lawsuit in February challenging the DOL ruling. The states argued that the joint employer rule undermined workplace protections for low-and middle-income workers and placed a regulatory burden upon states.
“Today’s ruling is a critical win for the many American workers who would experience wage theft or a decrease in income due to this reckless rule,” said James in a statement. “As our country continues to face the economic impacts of the COVID-19 crisis, we cannot allow lower- and middle- income workers to be put at an even greater financial disadvantage. I will continue to do everything within my legal power to ensure the Trump Administration does not interfere with hardworking Americans receiving the wages they deserve.”