DOL’s Proposed Rule Clarifies When Franchisors and Franchisees are Jointly Responsible for Complying with the Fair Labor Standards Act
In a case called Chen v. Domino’s Pizza, Inc.,1 a federal district court noted that “courts have consistently held that the franchisor/franchisee relationship does not create an employment relationship between a franchisor and a franchisee’s employees.”2
But these cases pre-dated the arrival of David Weil as the Wage and Hour Administrator at the Department of Labor (DOL).3 Before joining the DOL, Weil had been a professor at Boston University, where he wrote a report4 asserting that employers and employees have been “fissured” by, among other things, franchising relationships, and recommended as a solution that the DOL make franchisors directly responsible for the employees of their franchisees. Under Weil’s leadership, the DOL issued an Administrative Interpretation5 on joint employment which stated that joint employment under the FLSA is “notably broader than the common law,” and rejected any notion that only an entity which exercises control over employees can be a joint employer.
The appointment of a new Secretary of Labor, Alexander Acosta, in June 2017 appears to have abated the DOL’s focus on the breadth of joint employment. One of Acosta’s first acts as Secretary was to rescind the Obama-era joint employment Interpretation. Two years later, on April 1, 2019, the DOL issued a proposed joint employment regulation.
Proposed Rule Benefits Franchising Industry
The DOL’s proposed rule codifies many aspects of a 1983 decision from the Ninth Circuit Court of Appeals called Bonnette v. California Health & Welfare Agency.6 In Bonnette, the court was asked to decide whether a state welfare program for the elderly and infirm which funded in-home chore workers was a “joint employer” of those workers (it was not disputed that the patients for whom the in-home chore workers provided services were also employers). In response, the court announced a non-exhaustive four factor joint employment test which focused on whether the alleged joint employer:
Has the power to hire and fire the employees;
Supervises or controls employee work schedules or conditions of employment;
Determines the rates and method of payment; and
- Maintains employment records.1
The DOL’s proposed rule also uses these four factors to determine joint employment status. However, the proposed rule departs from Bonnette in one significant way: the potential joint employer “must actually exercise – directly or indirectly – one or more of [the] indicia of control.” In other words, businesses which have a contractual right to control another entity’s employees but do not exercise that control will not be considered joint employers. The proposed rule also makes clear that “The potential joint employer’s business model – for example, operating as a franchisor – does not make joint employer status more or less likely under the Act.”
The DOL’s proposed rule will be of particular importance in the franchising industry - in fact, it gives a hypothetical example which address franchising head on:
A franchisee of a global hospitality brand which provides the franchisee with employment-related forms and documents to be used in operating the business: a hypothetical franchisee owns a hotel and licenses the hospitality company’s brand. Under the franchise arrangement, the hospitality group provides the franchisee with a sample employment application, employee handbook, and other business documents. Under the licensing agreement, the franchisee is solely responsible for hiring and firing employees, setting the rates and method of pay, maintaining personnel records, and supervising its employees.
Under the proposed rule, the hospitality brand is not a joint employer of the franchisee’s employees because it does not exercise control over them – according to DOL, the fact that the hospitality brand provides form employment documents is insufficient to establish a joint employment relationship.
The proposed rule is a positive development for the franchising industry, but it is not a silver bullet. Businesses must still be aware of the law in the locations where they operate. For example, the Fourth Circuit Court of Appeals has rejected the Bonnette test and may be unlikely to give credence to the DOL’s new rule. The Second Circuit has rejected use of the Bonnette factors as being too narrow – instead, it uses its own test. State law may also be broader than the new regulation. Nevertheless, the DOL has put a thumb on the scale, bringing some clarity to a murky area of franchising law.
Ellen Kearns is a partner with Constangy, Brooks, Smith & Prophete, where she represents management in a full range of traditional labor and employment issues. She can be reached at firstname.lastname@example.org. Matthew Steinberg is an attorney with Constangy, Brooks, Smith & Prophete, and represents a diverse range of clients in employment litigation.