WASHINGTON -- Franchisors’ fears of being held legally accountable for franchisees’ employment practices were calmed by the U.S. Department of Labor’s decision to rescind a redefinition of the joint-employer standard. On June 7, U.S. Secretary of Labor Alexander Acosta withdrew the Labor Department’s 2015 and 2016 informal guidance on joint employment and independent contractors.
The legal construct sets out when a franchisor or contractor is liable for the policies of a franchisee or subcontractor. The Obama administration had in effect suggested the standard be reinterpreted to apply to more situations, raising fears that a brand’s owner would routinely be held accountable for the labor actions of franchisees.
That unofficial redefinition of “joint employer” was consistent with the more liberal interpretation adopted by the National Labor Relations Board (NLRB) in 2015. As a result of the change in the board’s thinking, restaurant workers, for example, brought legal actions against big chains like McDonald’s because of alleged labor misconduct by franchisees.
The franchise community protested, saying the reinterpretation would bring a blizzard of lawsuits against deep-pocketed franchisors, who might stop licensing in response. Many franchisors, including convenience-store retailers, saw the new standard as a fundamental threat to their business model.
Several legal actions are still before the NLRB, and the decisions in those instances could set legal precedence for a broadened definition of joint employer. But the decision by the Labor Department would likely be regarded as an indication of how the law underlying the joint-employer standard, the Fair Labor Standards Act (FLSA), is meant to be interpreted and applied.
“We are pleased the DOL is taking first steps to undo this costly regulation created by the previous administration,” said Matt Haller, vice president of public affairs for the International Franchise Association (IFA). “That being said, we urge Congress to now recognize the uncertainty and unreasonable costs the NLRB’s decision has placed on franchise owners and take action to find a true permanent solution.”
The National Retail Federation (NRF) welcomed the withdrawal of what it called the “burdensome” guidance issued under the Obama administration that was “significantly broadening the definition of a joint employer, creating seemingly limitless liability in business-to-business relationships.”
“Today’s announcement from the Labor Department is an important first step in reversing one of the most onerous regulations imposed by the previous administration on businesses,” NRF President and CEO Matthew Shay said. “Drastically expanding joint-employer liability to hold one business responsible for the actions of another independent business, such as a subcontractor or franchisee, did nothing to protect employees and only created uncertainty that led to more growth-chilling litigation. Retailers hope Congress will build on this progress and put the issue to rest once and for all with clear, fair legislation defining joint employers.”
Guidelines released in January 2016 by the Labor Department’s Wage and Hour Division set a broader definition of what could be considered a joint employer. Similarly, in an August 2015 ruling involving the waste-management company Browning-Ferris Industries and staffing agency Leadpoint Business Services, the NLRB said a company could be considered a joint employer even if it had only indirect or unexercised control.
In a separate case, the NLRB said McDonald’s could be considered a joint employer with its restaurant franchisees. Under guidelines followed for more than 30 years before the ruling, the NLRB held that a company had to have direct control over the actions of a subcontractor or franchisee’s employees in order to be considered a joint employer.
Removal of the administrator interpretations does not change the legal responsibilities of employers under the FLSA, as reflected in the department’s longstanding regulations and case law, the Labor Department said. It will continue to fully and fairly enforce all laws within its jurisdiction.
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