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Joint Employment Rules Get Clearer for Restaurants, Franchise Owners and Others

May 12, 2019

Franchise owners are about to get some welcome clarity around joint employer rules. The Department of Labor (DOL) has issued proposed rule revisions to clarify what constitutes a joint employer relationship, with a 60-day open comment period through June 10, 2019.

If the rule goes through as proposed, franchise owners can get some relief from the confusing and conflicting patchwork of regulatory decisions and legal precedent that left them maybe responsible or maybe not for the employment practices of their franchisees. 

The new rule, described by some as “employer-friendly,” aims to make it easier for employers to understand their obligations under the Fair Labor Standards Act (FLSA).

New Test for Determining Joint Employment

If you and another company are jointly responsible for an employee’s wages, you may have some joint employer liabilities under the FLSA. These rules protect an employee’s rights, particularly as they pertain to minimum wage, overtime amounts and liability.  

In a situation in which an employee works one set of hours for their employer, and that work simultaneously benefits another entity (franchisors and staffing firms, for example) the proposed rule change makes it clearer whether or not the second entity is actually considered a joint employer with liability.

The proposed rule change includes a four-factor test that determines whether an organization has the power to:

  • Hire or fire the employee
  • Supervise and control the employee’s work schedules or conditions of employment
  • Determine the employee’s rate and method of payment
  • Maintain the employee’s employment records

If none of these criteria are met, the organization in question would likely not be identified as a joint employer.

In addition to the four-factor test, the DOL has outlined certain factors, such as opportunity for profit or loss, investment in equipment or economic dependence that are not considerations in a joint employer evaluation.

What Does This Mean in Practice?

For clarity, the proposed rule includes examples of what would constitute joint employment. We’ve summarized a few examples below.

  • A cook works for two different franchisees of the same national franchise. The two local establishments do not coordinate with respect to the employee.

    Joint employer?
    No. Under the proposed rule, the restaurants are not joint employers because they are not acting in each other’s interest in relation to the cook. 
  • A cook works for two different restaurants owned by the same person. The restaurants coordinate the cook’s hours and decide jointly on the cook’s hourly rate.

    Joint employer?
    Yes, because they share common ownership and make joint decisions as to schedule and pay rate.

  • A franchisor provides franchisees with a sample employment application, sample employee handbook and other forms for use in operating the franchise. According to the licensing agreement, the franchisee is solely responsible for hiring and firing, setting pay rates, supervising employees and maintaining employment records.

    Joint employer?
    No. Providing sample forms and documents does not constitute direct or indirect control over the franchisee’s employees.

  • A country club contracts with a landscaper to maintain their grounds. According to the contract, the club does not have authority to supervise landscaping employee work. But in practice, a club employee does provide task instructions and keep occasional records of their work. What’s more, the club employee prompts the landscaping company to terminate an employee who failed to follow directions.

    Joint employer?
    Yes, because a club employee exercises sufficient control over the terms and conditions of the landscaping employees’ employment.

In another example, a large company imposes a code of conduct and a minimum wage to suppliers as a condition of being part of their supply chain. Per the example, that doesn’t constitute a joint employer relationship because the company does not exercise sufficient direct or indirect control over supplier employees.

Notably, the DOL tests are limited to “actions taken with respect to the employee’s terms and conditions of employment, rather than the theoretical ability” to take such actions. Imagine you sign a contract with a janitorial company, for example, that stipulates you have the right to oversee their staff and assign tasks, but in practice you and your employees do not supervise their work in any way. So, while you have the theoretical ability, you have not actually done so and would, potentially, not be ruled a joint employer. 

What Should You Do?

Recognize that these rules are not in their final form. Changes may be made before the final rules are implemented. If you would like to provide input, you can contact the DOL to provide comment by June 10, 2019. You can find notice of the joint employment rule, more example scenarios and contact info on the DOL website:

Review licensing agreements and vendor contracts for stipulations regarding control over employee work, record keeping responsibility and pay rates. Then look at actual staff practices to ensure they don’t expose you to joint employer responsibility where none is intended.

Under the new rules, franchisors may be able to provide more guidance regarding employment-related standards without risking joint employer liability. Consider whether you want to have more influence over employment practices for franchisee employees or other workers associated with your operation. If the answer is yes, seek consultation to ensure any changes in your business practices would pass the pending DOL test. 

If you have questions about the joint-employer test or other employment issues, contact your Wipfli relationship advisor.


Kelly R. Runge, CPA
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