How Does the Revised Joint Employer Rule Affect Franchisors?

by | Jan 27, 2020 | Blog, For Franchisors

A revised rule addressing joint employer status under the Fair Labor Standards Act (FLSA) announced January 12, 2020 may offer some relief to franchisors. Under the FLSA, employers must comply with federal minimum wage and overtime laws. An employer is defined as “any person acting directly or indirectly in the interest of an employer in relation to an employee[.]” Employees can have more than one employer, which is where franchisors are potentially implicated. Implementation of the existing Obama administration policy risked finding many franchisors were joint employers liable for labor law violations of their franchisees. The new rule which goes into effect March 16, 2020 provides much-needed guidance on this issue and on its face, more favorable treatment for franchisors. 

The joint employer rule may be raised in the franchise context because of arguments that a franchisee’s employees perform work that benefits the franchisor. Where an employee performs work for the employer that simultaneously benefits another individual or entity, the revised rule provides a four-factor balancing test to determine when a person or entity is “acting directly or indirectly in the interest of an employer in relation to the employee.” The test considers whether the potential 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.

The weight given to each factor will vary depending on the circumstances. Importantly, the rule also indicates what factors do not make joint employer status more or less likely. Among the factors most relevant to franchisors are provisions that specify that operating as a franchisor or entering into a brand and supply agreement or using a similar business model do not make joint employer status under the FLSA more or less likely. 

Although a franchise relationship by itself does not result in a joint employer finding, franchisors must take care in the level of control they exert over their franchisees’ employees. Best practice for franchisors includes reviewing franchise disclosure documents, agreements, and operations manuals to ensure they are not exerting too much control over the employment decisions and working conditions of the franchisees’ employees. In addition, franchisors should stay abreast of labor and employment law changes as they are amended frequently. To protect yourself, speak with an experienced franchise and employment attorney. 

If you have questions about the joint employer rule and its impact on franchising, feel free to contact Lusthaus Law.


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