Franchisors Beware (Update)

Department of Labor rescinds the Trump-era “Joint Employer Rule”

Joint employer status arises when employees claim that they work for not one but two “employers” thus making both “employers” liable for tax withholding, employment benefits, wage & hour violations, etc. For years the National Labor Relations Board (NLRB) had applied a test which required that to be held as a joint employer, a company had to be shown to not only have the contractual power to exercise control over a workforce’s terms and conditions of employment but also had to be shown that such company had actually exercised that control over the working environment. In the franchise context, exercising such control would include whether a franchisor:

1. Hires or fires the franchisee’s employees;
2. Supervises and controls the franchisee’s employees’ work schedule or conditions of employment;
3. Determines the franchisee’s employees’ rate and method of payment; and
4. Maintains the franchisee’s employees’ employment records.

The typical franchise agreement has always provided the franchisor with certain powers to ensure the franchisee was in compliance with the franchise agreement and Operations Manual (prepared by the franchisor) in order to promote and maintain uniformity within the franchise network. However, so long as the franchisor avoided direct involvement in the day-to-day activities of a franchisee’s employees, the franchisor was considered safe from being held as a joint employer of the franchisee’s employees.

However, as I posted back in September 2015, in 2015 the NLRB made a decision in Browning-Ferris Industries in which the Board adopted a new test to determine when joint employment was present. Under the new test a company only had to possess the potential to exercise control over a workforce’s terms and conditions of employment regardless of whether the company had actually exercised that power. Needless to say, this sent shock-waves throughout the franchise industry. Under the new test, a franchisee’s employees could argue that the franchise agreement provided each franchisor with sufficient power (whether or not actually exercised) to satisfy the new test and make the franchisor a joint employer and thus jointly liable for any and all work place violations occurring at a franchisee’s establishment!

Sensing the impact the Browning-Ferris rule could have on companies using independent contractors and franchisor/franchisee relationships, on September 14, 2018, the Trump-era NLRB proposed a rule to undo Browning-Ferris and reinstate its prior rule that:

“to be deemed a joint employer under the proposed regulation, an employer must possess and actually exercise substantial direct and immediate control over the employees’ essential terms and conditions of employment of another employer’s employees”

This new Joint Employer Rule, which took effect on March 16, 2020, was intended to clarify who might be deemed a “joint employer” by once again emphasizing the 4 factors listed above.

Under the new Joint Employer Rule, franchisors could once again take comfort that they would not be held as joint employers of a franchisee’s employees so long as they didn’t substantially control the day-to-day operations of the franchisee and its employees.

However, on July 29, 2021 the Biden-era Department of Labor (DOL) rescinded the Trump-era Joint Employer Rule by de-emphasizing the 4 factor test set forth above. The rescission of the Trump-era Joint Employer Rule goes into effect on September 28, 2021 which will essentially reimpose the Browning-Ferris rule thus expanding the scope of when franchisors could be potentially liable as a joint employer for a franchisee’s wage and hour violations under the Fair Labor Standards Act.

Article by Roger D. Linn © Barnett & Linn