Joint Employment Concerns Grow for Franchisors

Recent guidance issued by the Department of Labor ensures that, like 2015, joint employment will remain a hot topic for franchisors in 2016. Last year, the National Labor Relations Board (NLRB) captured the full attention of the franchise industry by “restating” the standard for finding joint employment in Browning-Ferris Industries of California, Inc., 362 N.L.R.B. No. 186 (Aug. 27, 2015). Though significant, direct, and immediate control was traditionally required to find that a company (like a franchisor) was the joint employer of another company’s employees, the NLRB held that indirect control or the reserved right to control, even if unexercised, may be sufficient to find a joint-employer relationship. In addition, the NLRB’s general counsel initiated several actions against McDonald’s USA, LLC and its franchisees, which seek to hold McDonald’s USA liable as “joint employer” for alleged labor violations by franchisees. Now the Department of Labor is entering the joint employment fray with an even more aggressive standard.

WHD’s Guidance

On January 20, 2016, the Department of Labor’s Wage and Hour Division (WHD), which is charged with enforcing federal minimum wage and overtime laws, issued an Administrator’s Interpretation (AI) regarding joint employment under the Fair Labor Standards Act (FLSA) and Migrant and Seasonal Agricultural Worker Protection Act (MSPA).¹ Noting that the definition of employment under these laws is “the broadest definition” in all U.S. employment laws — broader than the common law or the federal law at issue in Browning-Ferris — the AI argues that joint employment under the FLSA and MSPA is “as broad as possible.”

While the NLRB focused on the concept of the control in Browning-Ferris (including notions of indirect control and the reserved right to control), the WHD relies on a substantially broader “economic realities” standard to determine joint employment under the FLSA. According to the AI, this standard covers “a multitude of circumstances where the alleged employer exercised little or no control or supervision over the putative employees.”

The AI breaks joint employment into two scenarios — horizontal and vertical:

Horizontal joint employment may exist “when two (or more) employers each separately employ an employee and are sufficiently related to each other with respect to the employee.” For example, a horizontal joint employment relationship may exist when a server works at two restaurants owned by the same company.

Vertical joint employment may exist where an employee has an employment relationship with one employer (such as a staffing agency or subcontractor) and the “economic realities show that he or she is economically dependent on, and thus employed by, another entity involved in the work.” The AI list seven factors relevant to determining whether economic dependency exists for vertical joint employment purposes:

• Whether the potential joint employer, directly or indirectly, directs, controls, or supervises the work performed;
• Whether the potential joint employer has the power to hire or fire the employee, modify employment conditions, or determine the rate or method of pay;
• Whether the employee and potential joint employer have an indefinite, permanent, full-time, or long-term relationship;
• Whether the employee’s work for the potential joint employer’s business is repetitive and rote, is relatively unskilled, and/or requires little or no training;
• Whether the employee’s work is an integral part of the potential joint employer’s business;
• Whether the employee’s work is performed on premises owned or controlled by the potential joint employer; and
• Whether the joint employer performs common administrative HR or labor relations functions for the employee, such as handling payroll.

Relevance to Franchisors

Though the AI itself does not mention franchise relationships, an accompanying Question and Answer sheet issued by the WHD declares that “whether a particular franchisee and franchisor jointly employ a worker is based on the facts of each situation and must be made on a case-by-case basis applying the analyses discussed in the AI.” ²

As noted above, the WHD’s “economic dependence” standard is broader than the NLRB’s control standard. When joint employment exists, all joint employers are jointly and severally liable for compliance with the FLSA’s minimum wage and overtime requirements. That is, each joint employer is individually responsible for the entire amount of wages due. As a result, under the WHD’s expansive view of joint employment, a franchisor could be liable for any minimum wage or overtime violations by its franchisees.

Unlike a law or formal regulation, the AI does not carry the weight of law or receive deference in courts, which are free to disregard it. Nevertheless, some courts may find the AI persuasive. Moreover, expect plaintiffs’ attorneys to use the AI to try to pin liability for a franchisee’s FLSA violations on the franchisor.

Further, the AI comes at a time when the increased threat of joint employer liability is already harming the industry. Fearing joint-employment exposure, some franchisors are offering less guidance, training, and support to franchisees. Less franchisor support could foster increased franchisee costs.

Advice for Franchisors to Minimize Exposure

In light of Browning-Ferris and the WHD’s AI, there are steps a franchisor should take to minimize its risk of being declared a joint employer of its franchisees’ employees. These steps will also reduce the risk of a finding of common law vicarious liability for a franchisee’s employment practices in most states:

1. Clear Documentation Disclaiming Right to Control Franchisee’s Employees: Franchisors should review their franchise agreements and other documentation for evidence of actual or reserved control regarding a franchisee’s employees. Franchise agreements and other documentation, including manuals and handbooks, should make clear that franchisees are solely responsible for all employment and personnel matters, including the hiring, firing, supervising, disciplining, scheduling, and managing of their own employees. Franchisors should expressly disavow in writing any right to control these employment matters. Language regarding a franchisee’s personnel matters should be phrased as recommendations instead of requirements or, if requirements, described in the context of maintaining objective operational standards such as having ethical and courteous employees trained to provide a certain level of service and accommodate customer needs.

2. Avoid Actual Control Over Franchisee’s Employees: Franchisors should, in practice, implement only those controls necessary to protect the goodwill of the brand. Though the reach of the NLRB’s Browning-Ferris decision and WHD’s AI will not be known for some time, franchisors should still be entitled to implement controls over trademark, advertising, quality control, and unit appearance issues. This should include enforcement of operational requirements aimed at brand standards, including regarding sufficient staffing levels to meet customer needs and having courteous, trained employees. On the other hand, franchisors should avoid actual control over personnel policies or actions, including the hiring, firing, disciplining, and scheduling of the franchisee’s employees, whether direct or indirect. In addition, given the fact that it was reportedly McDonald’s USA’s use of technology that allowed it to make real-time staffing recommendations to individual franchisees based on real-time restaurant revenue that captured the NLRB’s attention, franchisors should be wary of technology that provides real-time employee-scheduling recommendations to franchisees.

3. Limit Contact with Franchisee’s Non-Management Employees: Franchisors should limit interactions with a franchisee’s non-management employees. When conducting inspections and site visits, the franchisor’s personnel should review operations only with the franchisee or its manager. The franchisor’s personnel should give directions or suggestions directly to the franchisee’s owner or manager and not to its employees. Because indirect control may trigger joint employment status, any such directions or suggestions should be focused on enforcing standards necessary to protect the goodwill of the brand, not the franchisee’s employment or personnel matters.

4. Avoid Administrative Functions For Franchisee’s Employees: The franchisee—not the franchisor—should perform all administrative functions regarding the franchisee’s employees, including handling payroll, providing workers’ compensation insurance, and providing the tools, materials, or safety equipment required for employees’ work.

5. Announce Independent Relationship: Franchisors should take steps to ensure that the franchisee’s employees and general public know they are employed by the independent franchisee and not by the franchisor. For example, franchisors should require franchisees to place conspicuous signage stating that the unit is independently owned and operated. In addition, franchisors should prohibit franchisees from using the franchisor’s name or marks in the franchisee’s corporate name or in employment-related documents, such as applications, employment agreements, evaluations, etc. If a franchisee imposes a personnel handbook on its employees, then the franchisor should request that the handbook expressly states that the worker is an employee of the franchisee—not the franchisor—and that the franchisor does not possess the right to control the employee’s performance of duties, scheduling, or other conditions of employment.

Gardere will continue to monitor how developments regarding the joint employer standard may affect franchisors. For questions, please contact experienced counsel.

¹ U.S. Department of Labor, Wage and Hour Division, Administrator’s Interpretation No. 2016-1 (Jan. 20, 2016), available athttp://www.dol.gov/whd/flsa/Joint_Employment_AI.htm.

² U.S. Department of Labor, Wage and Hour Division, “Joint Employment AI: Questions and Answers” at Answer 5, available athttp://www.dol.gov/whd/flsa/Joint_Employment_AI_faq.htm.

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