DOL proposes exact criteria to determine when franchisor and franchisee are joint employers

The department has suggested that a four-part test be used to determine when franchisors are liable for the labor policies and practices of franchisees.
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The U.S. Department of Labor (DOL) has issued its long-awaited new guidelines for determining when a restaurant franchisor can be held responsible for the labor policies and practices of franchisees, and the proposed new standard goes far beyond a simple redefinition of joint employer.

Instead, DOL is calling for a four-point test to determine when franchisor and franchisees are joint employers. The two parties would be regarded as equally responsible for the illegal employment actions of the franchisee if the franchisor:

  • Has the power to hire or fire employees;
  • Supervises and controls the employees’ work schedules or working conditions;
  • Determines employees’ pay rates or methods of payment; or
  • Maintains the employees’ employment records. 

In releasing the standards, DOL provided examples of when two affiliated business entities would be legally regarded as joint employers. Those examples suggest that the criteria have to be met directly. For example, the department cites the hypothetical situation whereby one company demands that suppliers and other affiliates of the business all pay more than the mandated minimum wage. In that situation, the company would not be regarded as a joint employer because it is not specifying what the employees have to be paid.

Establishing a new definition of joint employer has been a quest of the franchise community since 2015, when the National Labor Relations Board (NLRB) put forth a broadened definition that effectively held national chains liable for the labor practices of franchisees. The board had taken a decidedly pro-labor stance during the administration of President Obama.

Franchisors warned at the time that they would likely curb or cease franchising if the new definition held, citing the greater legal liability they faced. Any franchisee employee with a labor dispute would likely go after the deeper-pocketed franchisor, they warned.

Franchisees, meanwhile, expressed concerns about losing the local flexibility in hiring and managing a staff that has been a hallmark of the franchising model.

The franchise community cited the redefinition as an existential threat to the business model. 

The concept of joint employer was subsequently redefined, and far more narrowly, by an NLRB reconstituted by the Trump administration. But that guideline was knocked down because of concerns about a conflict of interest within the board, and the narrow standard prevailed.

“Through this proposal, the Department of Labor has the chance to undo one of the most harmful economic regulations from the past Administration and replace it with a rule that creates certainty for America’s 733,000 franchise businesses,” said Matt Haller, SVP of government relations and public affairs for the International Franchise Association, about the guidelines proposed Monday.  “An expanded joint employer standard has held back tens of billions of dollars in economic output each year due to a proliferation of frivolous lawsuits.”

Under standard rule-making practice, the public will be invited to submit comments to the DOL about the four-part test. The department will then issue a final ruling. The process normally takes about two months.

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