On January 12, 2020, the U.S. Department of Labor announced a final rule that updates its regulations interpreting when multiple entities can be held liable as “joint employers” for wage-and-hour violations under the Fair Labor Standards Act (“FLSA”). Because franchisors frequently face claims that they should be jointly liable to franchisees’ employees for franchisees’ alleged FLSA violations, franchisors should welcome the Labor Department’s final rule. The rule, which finalizes a proposal unveiled last year, expressly clarifies that operating as a franchisor does not make joint-employer status more likely under the FLSA. The rule further explains that several business practices common in franchising do not make joint-employer status more or less likely under the FLSA, including requiring a business partner (such a franchisee) to meet quality control standards or providing a sample employee handbook or other optional employment-related samples, forms and documents.

Current Confusion From Varying Standards

The FLSA requires employers to pay their nonexempt employees at least the federal minimum wage for every hour worked and overtime for every hour worked over 40 in a workweek. The Labor Department has long recognized that two or more entities may sometimes “jointly” employ a single employee under the FLSA. Each joint employer is jointly and severally liable for the employee’s wages. Under the Labor Department’s current regulations, which were implemented in 1958, multiple entities can be joint employers of an employee if they are “not completely disassociated” with respect to the employee’s employment.

Seeking to interpret the “not completely disassociated” standard, federal courts around the country have developed several different multi-factor tests for evaluating joint-employment claims under the FLSA. Some courts ask whether a particular employee is “economically dependent” upon an alleged joint employer, while other courts focus on the relationship between the two alleged joint employers. The result of these differing tests is that companies operating in multiple jurisdictions may face joint-employer liability in one jurisdiction, but not in another, for the same business practices.

The Labor Department’s Final Rule

In issuing its final rule, the Labor Department recognized that the current landscape of multiple, differing legal tests results in inconsistent treatment of similar worker situations, uncertainty for businesses and increased compliance and litigation costs. Seeking to promote greater uniformity in court decisions and predictability for organizations and employees, the Labor Department’s final rule replaces the “not completely disassociated” standard with a four-factor balancing test that assesses whether the putative joint employer:

1. Hires or fires the employee;

2. Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;

3. Determines the employee’s rate and method of payment; and

4. Maintains the employee’s employment records.

No single factor is dispositive under the four-factor balancing test, except the fourth factor (maintenance of employment records) by itself will not lead to a finding of joint-employment status. Whether an entity 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. Additional factors may be considered—but only if they are indicative of whether the potential joint employer exercises significant control over the terms and conditions of the employee’s work.

The final rule clarifies that a potential joint employer must actually exercise, directly or indirectly, control over the relevant employee to be jointly liable under the FLSA. While a reserved right to act in relation to the employee may be relevant, an unexercised reserved right alone does not demonstrate joint-employer status without some actual exercise of control. The final rule further clarifies that whether an employee is “economically dependent” on a potential joint employer is irrelevant.

In an especially positive development for franchisors, the final rule explains that a company’s business model, specifically including operating as a franchisor, does not make joint-employer status more likely under the FLSA. Other business practices that do not make joint-employer status more or less likely under the final rule include the following: a franchisor providing to a franchisee a sample employee handbook or other optional samples, forms and documents that relate to staffing and employment; two companies jointly participating in an apprenticeship program voluntarily; or two companies jointly offering or participating in an association health plan or association retirement plan voluntarily. In addition, companies are not joint employers under the FLSA simply because they ask or require their business partners (whether franchisees, subcontractors, etc.) to meet quality control standards, comply with the FLSA and similar laws, conduct background checks, maintain anti-harassment policies, institute workplace safety practices and training or otherwise be good corporate citizens.

In sum, the Labor Department’s final rule is very good news for franchisors as the revised regulation narrows the circumstances under which franchisors can be held jointly liable under the FLSA for the wages of their franchisees’ employees.

What’s Next?

The Labor Department’s final rule was published in the Federal Register on January 16, 2020 and will take effect on March 16, 2020.

Importantly, the Labor Department’s final rule only applies to joint-employer determinations under the FLSA. It has no bearing on the joint-employer analysis made by the Labor Department or other federal agencies under other federal labor and employment statutes, such as the National Labor Relations Act, the Occupational Safety and Health Act or Title VII of the Civil Rights Act. Nor will it impact joint-employer determinations under state law.

The National Labor Relations Board has proposed its own rule to clarify the joint-employment standard under the National Labor Relations Act, which rule is expected to be finalized soon. In addition, the U.S. Equal Employment Opportunity Commission recently indicated that it too will soon propose a joint-employer regulation.