Rule Would Ease Companies’ Liability for Franchisee Wage Violations

By Daniel Wiessner | April 2, 2019

The U.S. Department of Labor on Monday issued a proposal that would make it more difficult to prove companies are liable for the wage law violations of their contractors or franchisees, a top priority for business groups.

If adopted, the rule would likely help fast-food companies and other franchisors who have been sued by workers in recent years for wage-law violations by franchisees.

The department in 2017 had already repudiated legal guidance issued by the Obama administration that had expanded the circumstances in which a company could be considered a so-called joint employer under the federal Fair Labor Standards Act (FLSA).

Labor Secretary Alexander Acosta in a statement said Monday’s proposal would reduce litigation under the FLSA and provide clarity to businesses and courts. The FLSA mandates that workers be paid the minimum wage and overtime, among other requirements.

Publication of the rule kicked off a 60-day public comment period.

Under the proposal, companies would be considered joint employers only if they hire, fire, and supervise employees, set their pay, and maintain employment records. That would likely exclude many franchisors and companies that hire contract labor.

The Obama administration’s guidance included several other factors, such as the nature of the work being performed and whether workers were integral to a company’s business. That definition of joint employment had rankled the business community, which said it threatened the franchise business model and would lead to a spike in lawsuits.

Matt Haller, vice president at the International Franchise Association, a trade group, said the Obama-era rule had led to frivolous lawsuits and changed the way franchisors interacted with franchisees.

“Through this proposal, the Department of Labor has the chance to undo one of the most harmful economic regulations from the past administration,” he said.

The Obama-era regulation was not legally binding, but Monday’s proposal would be if it is adopted. That would make it more difficult for future administrations to undo, but also open it up to legal challenges.

The proposal comes as the National Labor Relations Board is moving to roll back a separate Obama-era standard for determining joint employment under federal labor law, which governs union organizing and workers’ rights to advocate for better working conditions. Under a rule the NLRB proposed in September, companies would have to possess direct control over working conditions to be considered the joint employer of franchise or contract workers.

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