In a significant move, the Department of Labor (DOL) has proposed a new rule governing the definition of joint employer status under federal wage and hour law, reversing course from Obama-era changes that had been announced in early 2016.
“This proposal will reduce uncertainty over joint employer status and clarify for workers who is responsible for their employment protections,” said Labor Secretary Alexander Acosta, when announcing it. “The proposed changes are designed to reduce uncertainty over joint employer status and clarify for workers who is responsible for their employment protections, promote greater uniformity among court decisions, reduce litigation and encourage innovation in the economy.”
The controversy over joint employer status in a variety of legal contexts has raged for years. During the Obama Administration, federal agencies sought to expand that status as broadly as they could. Since President Trump took office, those agencies—most notably the National Labor Relations Board—have been re-examining the issue with the intention of returning to the standards that were in place before Obama’s election.
The DOL joint employer rule has not been meaningfully revised in more than 60 years. However, in 2016 during the Obama Administration, DOL Wage and Hour Division Chief David Weil issued an Administrator Interpretation (AI) in which he adopted an expansive “economic realities” test to assess joint employer status, a test that heavily favored the finding of such status existed. The Trump DOL chose to withdraw Weil’s AI memo in June 2017, stating its intention to put a full-fledged rule in its place.
If adopted as proposed, under the new rule fewer businesses would likely find themselves considered joint employers by a court or agency when it comes to federal minimum wage, overtime regulations and other similar liability imposed by the Fair Labor Standards Act (FLSA). It would mainly affect staff leasing firms and franchise operations.
Unusual for a notice of proposed rulemaking, the DOL announcement includes extensive details and examples intended to show exactly what the new rule would mean and what ways it would directly impact employers in different situations.
To begin with, the proposed rule sets forth a four-factor balancing test to assess whether potential joint employer status exists. If a company is the indirect employer, the test asks if it:
- Hires or fires the employee.
- Supervises and controls the employee’s work schedule or conditions of employment.
- Determines the employee’s rate and method of payment.
- Maintains the employee’s employment records.
The proposal makes clear that “only actions taken with respect to the employee’s terms and conditions of employment, rather than the theoretical ability to do so under a contract, are relevant to joint employer status under the Act.”
This is a direct reaction to the Obama-era NLRB’s decision holding that joint employer liability exists if, at some point in the future the company wished to, it could choose to exert such control. The new Trump-era board’s own rulemaking proceeding regarding joint employer status is aimed at eliminating this possible future control standard when it comes to union organizing.
The DOL proposal also expressly states that certain business models (such as franchises), business practices (e.g., allowing an employer to operate a facility on premises), and certain business agreements (e.g., requiring vendors to institute sexual harassment policies) do not make a finding of joint-employer status more or less likely.
DOL stresses that “joint employer status is determined by the actions of the potential joint employer—not the actions of the employee or his or her employer. Whether the employee is economically dependent on the potential joint employer is not relevant for determining the potential joint employer’s liability” under the FLSA.
The franchise issue is vital because unions continue their long, hard-fought campaigns to organize franchise chain operations in the fast food industry, alleging that franchise employees are jointly employed by the parent company, and thus at a company like McDonald’s do not need to be organized on a franchise-by-franchise basis.
Literally Showing the Way
The DOL proposal is unusual in federal rulemaking in that it provides several hypothetical examples to help explain how the joint-employer regulation would apply to a variety of business scenarios, points out James J. Plunkett, an attorney with the law firm of Ogletree Deakins.
If the rule is ultimately adopted, joint employer status would exist in each of these examples:
• An employee who works at different restaurant establishments owned by the same person, whose schedule is coordinated and wage rate agreed on by the restaurants, since restaurants are sufficiently associated.
• A country club’s contract with a landscaping company does not give it the authority to hire or fire the landscaping employees or supervise them, but in practice, the country club sporadically assigns tasks, provides the landscaping employees with daily instructions, keeps records of their work, and directs the landscaping company to fire an employee. The country club exercises control, both direct and indirect, over the terms and conditions of employment.
• A packaging company utilizes a staffing agency, where it determines the rate of pay, supervises the work, and adjusts the number of workers and hours worked by each employee. In that case, the packaging company exercises sufficient control over the terms and conditions of employment.
DOL says that joint employer status would not exist in any of the following examples:
• An employee who works as a cook for different franchisees of the same nationwide franchisor. The two franchisees do not act in each other’s interest, either directly or indirectly.
• A janitorial services company has an agreement to clean an office park building, under which the building agrees to pay a fixed fee and reserves the right to supervise the janitorial employees in their performance of cleaning services but does not actually exercise the right of supervision. The reserved right does not demonstrate joint employer status.
• An association that provides optional group health coverage and an optional pension plan to its entity members, and the entity members who participate in the benefit plans. There is no control by the association over the entities’ employees, or by one entity over the other’s employees, and they are not acting directly or indirectly in the interest of the other.
• A large company that requires companies in its supply chain to comply with its code of conduct, which includes a minimum wage rate higher than the federal rate. The company is not acting directly or indirectly in the interest of the supply company in relation to the supply company’s employees.
• A global franchisor provides a franchisee with a sample employment application, handbook and other forms and documents. The franchisee is responsible for all day-to-day operations. The franchisor does not exercise direct or indirect control over the franchisee’s employees.
• A retail company contracts with a cell phone repair company to allow it to run its business operations inside the retail company’s premises, and requires the repair company have repair employees wear substantially similar shirts to its own employees and to institute a code of conduct requiring professional interactions with customers. The dress policy and code of conduct do not demonstrate substantial control over the repair employees by the retail company.
Employer groups are embracing the proposed rules, while labor unions and their political allies are expected to vigorously oppose it. Comments by union allies indicate their position is that the rulemaking cannot be anything more than an Administrative Interpretation because DOL lacks the requisite legal authority to adopt formal regulations in this area of law.
Employers who will find relief if this proposal becomes a rule welcomed it. “Through this proposal, the DOL has the chance to undo one of the most harmful regulatory actions from the past administration and replace it with a rule that creates certainty for America’s 733,000 franchise businesses,” said Matthew Haller, senior vice president at the International Franchise Association. “An expanded joint employer standard has held back tens of billions of dollars in economic output each year due to a proliferation of frivolous lawsuits, precipitating significant changes to the way franchise brands interact with their local owners.”
National Restaurant Association vice president of public policy and legal advocacy Shannon Meade responded, “For years, the prior administration served American restaurants a daily special of uncertainty and unpredictability. This rulemaking process is long overdue—putting this chapter behind us is a load lifted off the entire restaurant industry.”