Regulation & Legislation

DOL Proposes Criteria to Determine When Franchisor and Franchisee Are Joint Employers

Suggests four-part test to determine when franchisors are liable for labor policies and practices of franchisees
Photograph: Shutterstock

WASHINGTON The U.S. Department of Labor (DOL) has issued its long-awaited new guidelines for determining when a retailer 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, the 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, the 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.

“NACS welcomes the four-factor test proposed by the Department of Labor today,” said Jon Taets, director of government relations for Alexandria, Va.-based NACS. “The proposal appears to provide needed certainty to convenience retailers regarding potential labor-related liabilities with both franchise and supplier arrangements.”

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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