The attorneys general of 18 states have called on the U.S. Department of Labor (DOL) to change its proposed new standard for determining when restaurant franchisors are liable for the employment practices of franchisees, a protest that threatens the joint employer definition favored by the industry.
The letter was submitted on the same day the industry’s loudest voice on the issue, the International Franchise Association (IFA), came out strongly in favor of DOL’s proposed test for determining when franchisees and franchisors are joint employers sharing responsibility for a licensee’s employment policies. The near-simultaneous submission of comments to DOL suggests the tug-of-war over the definition of “joint employer” is not over despite years of politicking, protests and legal twists.
The franchising and restaurant industries have pushed for a narrow, practical standard that lessens the chances a franchisor will be sued or sanctioned for the labor-law violations of franchisees. They have leaned on Congress to resolve the matter by legislating a definition, instead of leaving it to the interpretation of courts and the National Labor Relations Board (NLRB).
The AGs and organized labor favor a broader definition, noting that wronged employees would fare better if they can seek redress from deep-pocketed brand owners such as McDonald’s Corp. instead of the mom-and-pop businesses that actually run the restaurants.
A broader standard could also help unions muster support for organizing the restaurant industry, since the wrongs of a lone franchisee could be amplified into a rallying cry for unionizing a whole chain.
The standard had been broadened under the NLRB during the Obama administration, posing what the franchise community said was a potentially lethal threat to their business model. Franchisors and their representatives said the legal exposure would prompt restaurant chains and other franchising operations to stop awarding franchises, and would likely cost brand owners an unaffordable amount in legal expenses. IFA research holds that the franchise community has spent $33.3 billion annually to defend itself from litigation under the broader standard.
A federal court blocked the application of that definition. Shortly afterward, a new standard was put forth by the NLRB after it and the DOL had been reconstituted by the Trump administration. But the redefinition was set aside because the new board included a lawyer whose firm regularly defends employers in labor disputes. An NLRB review committee decided the director should have recused himself, and it scuttled the new standard because of an apparent conflict of interest.
In April, DOL proposed a new standard based on four objective criteria. A franchisor could be regarded as a joint employer if it has the power to hire or fire a franchisee’s employees; supervise or control scheduling and workplace conditions; determines pay rates; or maintains records on the franchisee’s employees.
The letter signed by the 18 states’ chief legal officers was submitted as commentary on that proposed four-part test. It argues that a franchisor should be regarded as a joint employer if it has the ability to exercise any of the functions set out by the DOL, regardless of whether it exercised those capabilities.
The IFA lauded the proposed test for its practicality and ease of application.
“The Department of Labor has put forward a rule that can add much-needed clarity for franchise businesses,” said Matt Haller, the IFA’s SVP of government relations and public affairs, in a statement on the filing. “An expanded joint employer standard has cost the economy billions and slowed down hiring and job growth—this rule is a major step toward righting that wrong.”
The filing noted that franchisees are receiving less guidance and assistance on recruitment and retention, traditionally a major benefit of a franchising relationship, because franchisors are worried they’ll be flagging themselves as joint employers. It also posed 19 hypothetical situations where the applicability of the four-question standard would still be subject to interpretation.
The IFA remains in favor of fixing a definition by legislation rather than through rule-making.
Under the normal rule-making process, the DOL will weigh all of the comments and input that were provided by stakeholders during the public comment period, and then issue a final rule. The public comment period ended yesterday.
The states whose AGs signed yesterday’s letters were New York, Massachusetts, Pennsylvania, California, Connecticut, Delaware, Illinois, Maryland, Minnesota, New Jersey, New Mexico, North Carolina, Oregon, Rhode Island, Vermont, Virginia, Washington and Wisconsin. The District of Columbia was also part of the group.
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