How the Latest Joint Employer Liability Action Impacts Franchisors, Franchisees

Over the years, the joint-employer standard has been an ever-evolving issue to clarify what constitutes a joint employer, which has led to confusion and litigation in court jurisdictions around the country. Last year and now this year are no different as we look at the new rule of 2020 and its recent rescission.

Basically, a joint employer is an entity where two or more employers share liability for issues governed under the Fair Labor Standards Act (FLSA). The FLSA establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in federal, state, and local governments. Staffing agencies commonly have been deemed joint-employment relationships as well as franchisors/franchisees, such as restaurants and hotel chains.

DOL Issues the 2020 Final Rule

Last year, the Department of Labor (DOL) issued the 2020 Final Rule in an effort to clarify how to determine whether two separate entities are joint employers under the FLSA. The 2020 Final Rule contained standards for both “vertical” joint employment, in which an employee works for only one employer but depends on another business entity with respect to their work, and “horizontal” joint employment, in which an employee is employed by more than one distinct employer. If an entity is considered either a vertical or horizontal joint employer, it is “jointly and severally liable” (with any other joint employer of the employees at issue) for complying with the wage and hour provisions of the FLSA.

The 2020 Final Rule set forth a four-factor balancing test to determine whether an employer is a vertical joint employer:

  • Which employer is responsible for hiring and firing?
  • Which employer controls the employee’s duties and work schedule?
  • Who determines the employee’s pay rate and method of payment?
  • Who maintains employee records?

Regarding horizontal joint employment, the 2020 Final Rule stated that “if the employers are acting independently of each other and are disassociated with respect to the employment of the employee,” they are not joint employers, but “if the employers are sufficiently associated with respect to the employment of the employee, they are joint employers and must aggregate the hours worked for each for purposes of determining compliance with the [FLSA].”

The franchise industry viewed the 2020 Final Rule as a win, as the rule emphasized the actual, direct control that an employer exerts over a worker in determining whether or not an entity is a joint employer. It also expressly clarified that the typical franchise model does not make joint-employer status more likely.

This has now changed – again.

DOL Rescinds the 2020 Final Rule

Shortly after issuance of the 2020 Final Rule, attorneys general from 17 states and the District of Columbia challenged it in federal court, arguing that the joint-employer standard was too narrow.

On July 29, 2021, the DOL announced it is rescinding the 2020 Final Rule, to become effective September 28, 2021. The agency as of yet has not announced any new standard to replace the rule. This could result in different rulings by courts in different jurisdictions as to how they apply FLSA cases for franchisors and franchisees.

As the joint-employer standard continues to be a fluid and confusing issue, franchisors and franchisees should keep apprised of ongoing developments in this area to best evaluate the risks of employee-related claims. Make sure your clients speak with counsel regarding the rescission of 2020 Final Rule, all contractual obligations between franchisor and franchisee, and their employment best practices. In addition, review each client’s Employment Practices Liability Insurance (EPLI) policy and what coverage is available regarding FLSA-related claims.

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