Franchisor 101: New Joint Employer Rule Nixed for Now

Lewitt HackmanIn another twist to the joint employer saga, a United States District Court in New York voided the Department of Labor’s (“DOL”) new rule for joint employment. Eighteen (18) states and the District of Columbia brought a lawsuit challenging the rule. The court found that DOL’s new rule conflicts with definitions in the Fair Labor Standards Act (“FLSA”) and is both arbitrary and capricious.

DOL’s new joint employment rule uses a four-part test to determine if an employer is a joint employer of another company’s employees. If met, an employer would be jointly and severally liable to another company’s employees for damages for violating the FLSA.

The test consists of whether the alleged 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 of pay and method of payment; and (4) maintains the employee’s employment records.

The court rejected the new rule as contrary to law because it conflicted with the FLSA. The rule used the FLSA’s definition of “employer” as the sole basis for joint employer liability, while ignoring interrelated definitions in the FLSA for “employer,” “employee,” and “employ.” There was also inconsistency in the rule’s creation of separate tests to determine whether an entity is an “employer” and whether the entity is a “joint employer.”

The court also found the rule was arbitrary and capricious. This was due to (1) inability of DOL to explain why it departed from prior interpretations of joint employment; (2) conflict between the FLSA and the Migrant and Seasonal Agricultural Workers Protection Act (“MSPA”) despite the MSPA regulations which state that the joint employment test should be the same under both the MSPA and FLSA; and (3) failure to adequately consider the new rule’s cost to workers, such as wage theft by employers or an employer’s insolvency.

The International Franchise Association intervened in the case to support DOL. This lets IFA appeal the decision, if they choose to do so. For now, this ruling invalidates the DOL rule and creates uncertainty for employers.

Franchisors should get advice of counsel as to how this opinion impacts their franchised business, within the context of implementing best practices during the COVID-19 pandemic. While the joint employer saga is likely to continue and generate more guidance in the future, franchisors should ensure, at a minimum, that franchisees determine essential terms of employment, including hiring, firing, discipline, wages, and when and where work will be performed.

State Of New York et al v. Scalia, No. 1:20-cv-01689 (Sept. 8, 2020).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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