DOL Final Rule Brings Clarity to the Joint Employer Standard and for Franchise Businesses

On January 13, 2020, the U.S. Department of Labor (DOL) released its highly anticipated Final Rule regarding joint employer status under the Fair Labor Standards Act (FLSA). The Final Rule was published in the Federal Register on January 16, 2020 and will become effective 60 days from its publication, or March 16, 2020.

The regulations have not been revised in over 60 years, and courts have long issued divergent and inconsistent rulings on the joint employer issue based on these outdated regulations. According to the Department, the current regulations have “resulted in uncertainty for employers and workers and increased compliance and litigation costs.” The Department’s Final Rule is a major overhaul and rewrites the outdated regulations, offering updated guidance for determining joint employer status. The Final Rule promises to “promote greater uniformity among court decisions, reduce litigation, and encourage innovation in the economy.”

What is the FLSA?

The FLSA requires covered employers to pay their employees at least the federal minimum wage for every hour worked and overtime for every hour worked over 40 in a workweek. To be liable for paying minimum wage or overtime, a person or entity much be an “employer,” which the FLSA defines to “include[ ] any person acting directly or indirectly in the interest of an employer in relation to the employee.” Under the FLSA, an employee can have two or more employers who are jointly and severally liable for the wages due to an employee.

The Final Rule sets forth a four-factor balancing test to determine joint employer status under the FLSA. The Department will examine whether the potential joint employer:

• Hires or fires the employee
• Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree
• Determines the employee’s rate and method of payment
• Maintains the employee’s employment records (i.e., payroll records that reflect, relate to or otherwise record information in control factors 1-3).

No single factor is dispositive in determining joint employer status, and the weight of each of the facts vary based on the facts of each case. Notably, the Final Rule makes clear that a company’s maintenance of the employment records of another company’s employee alone will not establish joint employer status.

The Final Rule provides guidance on how to apply the four-factor balancing test. To be a joint employer, the other person must actually exercise - directly or indirectly - one or more of the four control factors. In some instances, the ability, power or reserved right to act in relation to the employee may be relevant to determine joint employer status, but these factors alone do not demonstrate joint employer without some actual exercise of control.

The Final Rule identifies factors not relevant to the determination of joint employer status. The employee’s “economic dependence” is not relevant to determine whether the worker has a joint employer. Other such factors are:

• Whether the employee is in a specialty job or a job that otherwise requires special skills, initiative, judgment or foresight
• Whether the employee has the opportunity for profit or loss based on his/her managerial skill
• Whether the employee invests in equipment or materials required for work or the employment of helpers
• The number of contractual relationships, other than with the employer, that the potential joint employer has entered into to receive similar services

Most notably, the Final Rule identifies certain business models (such as franchising) and certain business practices (such as allowing the operation of another store on one’s premises or providing an employee handbook or other forms) do not make joint employer status more or less likely. Merely the use of a franchise model does not mean that a franchisor is more likely to be the joint employer of its franchisee’s employees. Also, certain contractual agreements do not make joint employer status more or less likely, such as:

• Requiring background checks
• Requiring inclusion of standards, policies and procedures in an employee handbook
• Instituting sexual harassment policies
• Mandating that employers comply with their obligations under FLSA or other similar laws
• Establishing workplace safety practices or protocols
• Requiring that workers receive training regarding matters such as health, safety or legal compliance
• Requiring the inclusion of such standards, policies, or procedures in an employee handbook

Contractual agreements requiring quality control standards to ensure the consistent quality of the work product, brand or business reputation also do not make FLSA joint employer status more or less likely. Parties may monitor and enforce such agreements without making it more or less likely that a joint employer relationship exists.

Implications for Franchise Businesses

Section 791.2(d)(2) states that “[o]perating as a franchisor or entering into a brand or supply agreement, or using a similar business model does not make joint employer status more likely under the Act.”

Indeed, the Final Rule offers an illustration of what does not constitute joint employer status for franchise businesses. For example, a global hotel franchisor (A) has hundreds of franchise agreements with hoteliers. One hotel operator (B) is a licensee of the A’s brand, which gives franchisee B access to certain proprietary software for business operation and payroll processing, and A provides B sample employment applications, employee handbooks and other forms used in operating the franchise (i.e., sample operation, marketing and business plans). The licensing agreement is a typical, industry-standard document explaining that B is solely responsible for all day-to-day operations, including hiring and firing employees, setting the rate and method of pay, maintaining records, and supervising and controlling conditions of employment.

The DOL determined under these facts that A is not a joint employer of B’s employees because A does not exercise direct or indirect control over B’s employees. The act of providing optional samples, forms and documents that relate to staffing and employment does not amount to direct or indirect control over B’s employees that would establish joint liability.

The Final Rule is consistent with recent developments in franchise employment law. In Salazar v. McDonald’s Corporation, the Ninth Circuit emphasized that “McDonald’s involvement in its franchises and with workers at the franchises is central to modern franchising and to the company’s ability to maintain brand standards, but does not represent control over wages, hours, or working conditions” such that it is joint employer under California’s wage and hour law. 944 F.3d 1024, 1030 (9th Cir. 2019). However, the Department acknowledged the possibility that some business models could be devised in such a way that would involve the exercise of control over employees’ conditions of employment and make joint employer status more likely.

Next Steps

The Final Rule is considered a positive development for businesses, including franchisors and franchisees, as the new standard for determining joint employer liability is clearer and provides practical guidance. The four-part balancing test could bring uniformity among the courts. Business owners should continue to review their business models, business practices and contractual agreements to ensure they are not devised in a way that would involve the exercise of control over another company’s employees.

Further, employers should note that the Final Rule does not address joint employer status under other federal employment laws, such as the National Labor Relations Act. The Equal Employment Opportunity Commission and National Labor Relations Board have been working to finalize proposals that would also hopefully limit joint employer liability.