In a victory for franchisors, the U.S. Department of Labor issued Sunday a final rule to update the controversial “joint employer” regulations. They had not been meaningfully updated in more than 60 years.

The new rule clarifies when a worker is employed by more than one company—a distinction critical to franchise companies and firms that outsource services, like cleaning. For restaurants in particular, it brings some closure to what’s been an ongoing source of legal concern and dispute in recent years.

The issue took center stage in December 2014, when the National Labor Relations Board filed unfair labor charges against McDonald’s for the alleged violations of its franchisees. Then, in Browning-Ferris, 362 NLRB No. 186 (2015), the NLRB held that a franchisor need only exert indirect control or even just reserve the right to control the terms and conditions of employment in order to qualify as a joint employer—even if the control was never actually exercised.

This decision, which overturned years of precedent, meant that franchisors could be on the hook for the labor violations of their franchisees, even if they did not exercise control over the alleged unlawful practices.

In early 2016, the DOL issued guidance in a similar vein, focusing on the “economic dependence” of a worker on a putative joint employer—including whether the putative joint employer had the right to control employment terms and conditions—to determine joint-employer liability under the Fair Labor Standards Act.

Sunday’s decision, needless to say, is a welcome development for restaurant franchisors.

Taking effect in 60 days, there will now be a four-factor balancing test for determining FLSA joint employer status in situations where an employee performs work for one employer that simultaneously benefits another entity or individual.

They are:

  • 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
  • Maintains the employee’s employment records

Now, under the FLSA, an employee may have, in addition to his or her employer, one or more joint employers—additional individuals or entities that are jointly and severally liable with the employer for the employee’s wages, the DOL said in a release. The FLSA requires covered employers to pay their employees at least the federal minimum wage for every hour worked and overtime for every hour worked over 40 in a workweek.

“This final rule furthers President Trump’s successful, government-wide effort to address regulations that hinder the American economy and to promote economic growth,” Secretary of Labor Eugene Scalia said in a statement. “By giving greater clarity to businesses who want to work together, we promote an entrepreneurial culture that has driven American prosperity for decades.”

“The changes in this final rule break down barriers that keep companies from constructively overseeing, guiding and helping their business partners,” added wage and hour division administrator Cheryl Stanton. “For small business owners, and the employees working in those businesses, the relationship and the guidance coming from franchisors and other contracting companies can greatly improve the workplace and help them create jobs.”

A key change is Sunday’s final rule clarifies when additional factors may be relevant to a determination of FLSA joint employer status and identifies certain business models, contractual agreements with the employers, and business practices that do not make joint employer status more or less likely.

Or, put simply, the revisions add certainty regarding what business practices may result in joint employer status. “This rule promotes greater uniformity among court decisions by providing a clearer interpretation of FLSA joint employer status. These benefits will in turn improve employers’ ability to remain in compliance with the FLSA and will help reduce litigation costs,” the DOL said.

According to some estimates, roughly 14 million Americans classify under “alternative work arrangements,” like temp firms, contractors, and franchises.

Many franchise organizations railed against the former policy, unveiled under the Obama administration in 2015, for resulting in a large increase in lawsuits against restaurant chains.

The National Restaurant Association applauded Sunday’s decision. “It ensures clarity and predictability for employers and employee under the Fair Labor Standards Act,” Shannon Meade, vice president of public policy, said in a statement. “But, it is important to note that while this is an important development, it is one of just three key joint employment rules pending in other agencies. Our work to support these pending rules will continue so that we can ensure workers and employers have clarity and certainty and no longer face a climate of politicization and ambiguity.”

Franchisors have long argued the former model could halt growth due to liability, and that they would need to become more heavy-handed in operator’s store-level practices, like hiring. The International Franchise Association previously said lawsuits related to joint employer definitions hiked 93 percent after the 2015 rule.

IFA said the expanded joint employer standard cost the American economy $33.3 billion per year and led to 376,000 fewer job opportunities.

“This groundbreaking research demonstrates what businesses have long said: an expanded joint employer standard hampers their growth, hinders their operations, and halts their hiring. Its harms on the economy are clear, and regulators and elected officials should move quickly to return to a narrow, clearly-defined joint employer standard,” IFA president and CEO Robert Cresanti said in January 2019.

Recently, the NLRB sided with McDonald’s in a long-running case, saying the chain should not be held responsible for the labor practices of franchises. Twenty workers claimed to be fired or subject to retaliation for attempts to unionize.
The NLRB favored a settlement where McDonald’s franchisees paid $171,636 to the workers. They must also now notify current and former employees about the settlement and set up a $250,000 fund to handle future claims. If the NLRB had ruled in favor of the workers, it would have increased McDonald’s liability and potentially opened the door for its 850,000 or so U.S. workers to form a union.

Per Bloomberg Law, the NLRB is also moving to finalize a proposal to limit shared responsibility for collective bargaining and unfair labor practice purposes.

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