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Fair Labor Standards Act Final Joint Employer Decision: Will It Be Good For Franchisors?

The short answer is yes.

It will be good for franchisors beginning March 16, 2020.  In fact, it is the ruling that instigated a collective sigh of relief from concerned franchisors nationwide, as all eyes have been on California and the latest joint employer status challenges of the past few years. On January 12, 2020, the U.S. Department of Labor announced a final rule to update the regulations interpreting joint employer status under the Fair Labor Standards Act (FLSA).

Simply put, regulations that haven’t been updated in 60 years, had the potential to completely undermine the franchisor/franchisee relationship that the franchising industry has been built on. The final ruling, however, will not have the detrimental effects many had feared.

As part of the ruling, the Department of Labor provides a four-factor test, an A-B-C test, for determining FLSA joint employer status in situations where an employee performs work for one employer while benefitting another entity or individual at the same time. This test examines whether the potential joint employer:

  • Hires or fires the employee;
  • Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
  • Determines the employee’s rate and method of payment; and
  • Maintains the employee’s employment records.

In each of these cases, the responsibility falls under the franchisee, not the franchisor, freeing the franchisor from responsibility, and ultimately litigation, when it comes to the day to day actions of employees systemwide – all of which is spelled out in legal documents and contracts. Which leads us to our next point.

Most importantly to the franchising industry, the new rule clarifies when additional factors may be relevant to a determination of FLSA joint employer status and identifies certain business models, contractual agreements with the employer, and business practices that do not make joint employer status more or less likely.

This part of the ruling, specifically Part 791, speaks directly to the franchising industry:

“The final rule also identifies certain other factors that do not make joint employer status more or less likely under the Act, including operating as a franchisor or entering into a brand and supply agreement, or using a similar business model;”

We are an industry which is precisely constructed upon business systems, the FDD and the Franchising Agreement – contracts, business models and business practices. The new ruling takes us out from underneath the umbrella covering the gig economy and other joint employer major players.

It is good news for franchisors. After years of multiple court appearances and appeals, they can finally breathe a little easier.

[1] https://www.dol.gov/newsroom/releases/whd/whd20200112

[2] https://www.dol.gov/newsroom/releases/whd/whd20200112

[3] https://www.dol.gov/agencies/whd/flsa/2020-joint-employment

[4] https://www.dol.gov/agencies/whd/flsa/2020-joint-employment/fact-sheet

Harold L. Kestenbaum, Esq. Partner, Spadea Lignana Attorneys at Law
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