Franchisors take note: broader DOL "joint employer" interpretation adds more risk for franchise industry

FranCast Series



While the franchise industry's attention has been focused on the NLRB's new and expanded joint-employer test, the Department of Labor has quietly continued its assault on what it calls the "fissured" employment landscape by issuing a new Administrator's interpretation on joint-employer status under the FLSA.

This follows the DOL's initiative to dramatically overhaul the "white collar" exemptions under the Fair Labor Standards Act. As the DOL continues to pursue its aggressive enforcement efforts at the franchisee level, the DOL's new interpretation adds another dimension of legal risk for the franchise industry.

The Administrator's interpretation, issued January 20, adopts an expansive definition of joint employment which exceeds even that advanced by the National Labor Relations Board. The DOL stresses that joint employment "should be defined expansively" under the FLSA and that the concept of joint employment under the FLSA is "notably broader" than the common law test for joint employment. According to the DOL, unlike the common law's focus on whether the putative joint employer exercises control over the employee, under the FLSA an employer may be jointly liable where the employee is economically dependent on the putative joint employer – even when the putative joint employer "exercise[s] little or no control or supervision over the putative employees."

The DOL recognizes two types of joint employment:

Horizontal joint employment – the more traditional version – exists "when two (or more) employers each separately employ an employee and are sufficiently associated with or related to each other with respect to the employee."  For example, a horizontal joint employment relationship might exist where two separate franchise restaurants share economic ties, have overlapping staff and supervisors, and share payroll functions. Notably, however, the mere fact that an employee works at two separate restaurants with the knowledge of both owners is not sufficient, standing alone, to establish a joint employer relationship.

Vertical joint employment – the more expansive version – exists "where the employee has an employment relationship with one employer … and the economic realities show that he or she is economically dependent on, and thus employed by, another entity involved in the work." The DOL has found vertical joint employment where a staffing agency, professional employer organization, or other intermediary contracts with a second employer to provide labor or other employer functions (e.g., hiring or payroll). As relevant to franchisors, the DOL suggests that a vertical joint employment relationship may be found where the putative joint employer handles payroll or performs other employer functions, sets hours or schedules, or is involved in the hiring or supervision of the employee.

Franchisors can expect that the DOL will continue its aggressive enforcement efforts against fissured employment relationships. In an ominous and cautionary note, the DOL states that it "may consider joint employment to achieve statutory coverage, financial recovery, and future compliance, and to hold all responsible parties accountable for their legal obligations."  We also anticipate that the DOL's interpretation will provide fresh ammunition for the plaintiffs' bar to go after franchisors when pursuing employment claims at franchised units, opening franchisors up to costly lawsuits even where the franchisor did not directly engage in any misconduct.

The dedicated franchise and employment lawyers at DLA Piper are available to assist franchisors in evaluating and modifying their policies and practices to minimize the risk of a joint employment relationship while preserving brand standards and quality. Please contact the authors to find out more about the ever-evolving joint employment issues in the franchise context.