GrayRobinson Labor & Employment E-lert: Franchisors and Contractors Take Note: Joint Employer Liability Remains Murky

By: S. Douglas Knox, Of Counsel | August 3, 2021

On July 29, the U.S. Department of Labor (DOL) formally rescinded the Trump administration’s March 6, 2020 rule (2020 Rule) that narrowed the circumstances under which companies may be liable as “joint employers” under the Fair Labor Standards Act (FLSA).

For years, joint employment has been a contentious topic for companies in the franchise, construction and hospitality industries. Under certain circumstances, an employee of one company may be a joint employee of a second company, depending on the second company’s extent of control and supervision over the employee. If the second company is deemed a joint employer, both companies might be liable for wages and overtime pay under the FLSA. This poses special risks to franchisors, whose operating standards may influence franchisees’ employment practices, as well as contractors, who may be deemed jointly liable with staffing companies or subcontractors providing labor.

Under the 2020 Rule, factors for determining joint employment were limited to whether the company is responsible for hiring and firing employees, substantially supervises and controls employees’ work schedules and conditions of employment, sets employees’ rate and method of pay, and maintains employment records. The 2020 Rule also provided that a franchise business model should not be considered as a factor in determining joint-employer status. In addition, it excluded the following factors from the joint employment analysis: providing a sample employee handbook to a franchisee; allowing an employer to operate a facility on the company's grounds; jointly participating with an employer in an apprenticeship program; offering an association health or retirement plan to an employer or participating in a plan with the employer; and requiring a business partner to establish policies such as minimum wages, workplace-safety, and sexual-harassment-prevention.

In a ruling that applied only in New York, a federal court in the Southern District of New York vacated much of the 2020 Rule on September 8, 2020. The court ruled in favor of the seventeen state attorneys general and the District of Columbia who filed the lawsuit. The court found that the 2020 Rule limited the protections Congress intended to provide under the FLSA and further violated the Administrative Procedure Act's rulemaking process. Trade groups, including the International Franchise Association, the National Retail Federation, the Associated Builders and Contractors, and the American Hotel and Lodging Association, were permitted to intervene as defendants in the case. They argued that the 2020 Rule provided much needed clarity and guidance on joint employment in their industries.

An appeal of that decision remains pending before the Second Circuit Court of Appeals. Given its recent rescission of the 2020 Rule, DOL may move to dismiss the appeal. In a brief filed in May, DOL took no position on the merits of the 2020 Rule, but argued that the plaintiff States lacked standing to challenge the regulation in federal court.  

In a press release announcing its rescission, DOL explained that the 2020 Rule was inconsistent with the FLSA and improperly limited the factors that courts and the agency could use to determine joint employer liability. The regulation rescinding the 2020 Rule will take effect September 28.

Effect of Rescission for Businesses Concerned with Joint Employer Liability

In rescinding the 2020 Rule, DOL explained it was not implementing an alternative regulatory framework for determining joint employment. Rather, DOL “will continue to consider legal and policy issues relating to FLSA joint employment before determining whether alternative regulatory or subregulatory guidance is appropriate.” What does this mean for businesses concerned with joint employer liability?

For starters, businesses may no longer rely on the clarity provided by the rescinded rule. With that said, the 2020 Rule’s joint-employer factors should be considered a starting point for compliance and planning. In other words, businesses seeking to avoid joint employer liability should have no control over other businesses’ hiring, firing, supervision, or control of employees and their work conditions. Nor should they set other businesses’ pay or maintain their employment records. But complying with these factors alone will no longer protect a businesses from joint employer liability.

The DOL regulation rescinding the 2020 Rule directs businesses to be familiar with prior case law and administrative decisions interpreting joint employer liability. Unfortunately, those cases are not uniform, and businesses must pay close attention to their businesses models and practices in each state where they do business or might expand.