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DOL Final Rule Limits Joint Employer Liability

January 14, 2020

The Trump Administration has begun 2020 by revising an Obama administration policy that potentially made franchisor corporations, such as McDonald’s, legally liable for failures by their franchisees to properly pay overtime or minimum wages, even if the franchisees were legally independent businesses. The Final Rule from the U.S. Department of Labor, which takes effect March 16, 2020, limits the circumstances under which employers, such as a franchiser and its franchisees, can be considered to jointly employ workers under the Fair Labor Standards Act (FLSA).

The Final Rule recognizes a scenario where a person works for one employer, but another individual or entity simultaneously benefits from that work. The Final Rule adopts a four-factor balancing test to determine whether the potential joint employer is directly or indirectly controlling the employee, assessing 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; and
  • maintains the employee’s employment records.

Whether a person is a joint employer will depend on all the facts in a particular case, and the appropriate weight to give each factor will vary depending on the circumstances.

The Final Rule also identifies factors that are not relevant to the determination of FLSA joint employer status. For example, the Final Rule specifies that whether the employee is economically dependent on the potential joint employer, including factors traditionally used to establish whether a particular worker is a bona fide independent contractor, is not relevant to determine joint employer liability. The Final Rule also identifies certain other factors that do not make joint employer status more or less likely under the Act, including:

  • operating as a franchisor or entering into a brand and supply agreement, or using a similar business model;
  • the potential joint employer’s contractual agreements with the employer requiring the employer to comply with its legal obligations or to meet certain standards to protect the health or safety of its employees or the public;
  • the potential joint employer’s contractual agreements with the employer requiring quality control standards to ensure the consistent quality of the work product, brand, or business reputation; and
  • the potential joint employer’s practice of providing the employer with a sample employee handbook, or other forms, allowing the employer to operate a business.

In a Wall Street Journal editorial, Labor Secretary Eugene Scalia stated that the Final Rule re-imposed a rational standard and removed uncertainty:

"The new rule also gives companies in traditional contracting and franchising relationships confidence that they can demand certain basic standards from suppliers or franchisees—like effective antiharassment policies and compliance with employment laws—without themselves being deemed the employer of the other company’s workers. That will help companies promote fair working conditions without facing unwarranted regulatory costs."

While business groups are lauding the Final Rule, pro-labor groups complain the new regulation limits employees’ ability to seek recourse for overtime and minimum wage violations and allows franchisers to skirt their responsibilities under the FLSA.

The Final Rule will be published in the Federal Register on January 16, 2020, and the Department of Labor has issued a Joint Employer Final Rule Frequently Asked Questions.