Outside Insights | June 2017 | By Guest Author

What's Next for the Controversial Joint Employer Rule?

The Department of Labor announced that it was withdrawing the much-maligned guidance. But what does that mean exactly?
How should franchisors and franchisees conduct business in the face of the continuing uncertainty over joint employer law? Thinkstock
Bookmark/Search this post
Email this story Email this story
Printer-friendly versionPrinter-friendly version

Read More About

The Obama Administration, through the U.S. Department of Labor as well as the National Labor Relations Board, made it clear that it was going to take an active role in reshaping the landscape of employment and independent contractor relationships.

In early 2015, the DOL issued guidance regarding the determination of whether workers are employees or independent contractors (concluding that most workers currently classified as independent contractors are indeed employees under the “economic realities” of the relationship between the worker and the entity he/she works for). Also in 2015, in the Browning-Ferrisruling, the NLRB significantly expanded the doctrine of joint employers and ruled that franchisors may well be joint employers of a franchisee’s employees, laying aside years of settled precedent that an actual ability and immediate exercise of control over employees was needed (rather than the mere potential for such control). 

In 2016, the DOL issued guidance that echoed NLRB’s logic in Browning Ferris as to when a “joint employment” relationship exists. The DOL addressed the joint employer doctrine in two ways: one, it adopted the concept of “shared” employees in a “horizontal” joint employment situation (where there are elements such as common ownership and control between the employers). Second, and much more controversially (but consistent with Browning Ferris), the DOL adopted the concept of a “vertical” joint employment scenario where no direct control of an employee was required (for example, a franchisor over the employee of a franchisee) to find a joint employer relationship—only an “economic dependence” of the employee on the upstream “employer.” 

The wording was both broad and vague, and logically could pull in both franchisors and other entities with otherwise attenuated relationships with, and little to no control over, the employees at issue. 

Earlier this month, as reported in QSR, the DOL has announced that it was withdrawing the above guidance. The press release also noted that “[r]emoval of the administrator interpretations does not change the legal responsibilities of employers under the Fair Labor Standards Act... [t]he department will continue to fully and fairly enforce all laws within its jurisdiction…”

What effect will the DOL’s withdrawal have?

Neither the DOL guidance, nor the withdrawal of such guidance, changes the law regarding joint employers (or for that matter, the law regarding independent contractor/employee classification).  The NLRB’s Browning Ferris ruling is on appeal to the D.C. Circuit Court, and the decision of this court, of course, will have the force of law. (Oral argument was heard in this case on March 9, 2017, so a decision should be issued soon.) But where do employers stand right now?

For now, we have returned to the pre-2015 status quo. Plaintiff-employees who seek to sue franchisors and other purported “joint employers” will no longer have the argument that their views under federal law (the FLSA) are supported by the interpretations of the Department of Labor—nor will they, at least for the present, be able to cite Browning Ferris as favorable law.  But this is not a cause for celebration for employers: the law defining what an “employer” really is, at the federal level and that of many states, is vague and unhelpful.

What would most help employers, aside from a reversal of Browning Ferris, is a concerted effort by Congress to create new law that clearly enunciates a useful and workable definition of what an “employer” is in the 21st century economy. Until then, employers will have to continue to litigate joint employer issues on the basis of existing common law factors, which center around the degree of control a purported joint employer exercises over employees. The dilemma is that such common law tests, although marginally better than what the DOL and the NLRB provided in 2015 and 2016, have no bright lines, and resolve joint employer issues on fact-intensive, case by case basis.

Before the withdrawal of the DOL guidance, in October 2016, in the case of Ochoa v. McDonald’s Corporation, McDonald’s agreed to pay $3.75 million in settlement of claims that it was, as a joint employer, responsible for the wage-hour violations of a California McDonald’s franchisee. Many franchisors have since worried that McDonald’s decision was ill-considered, given the unsettled state of joint employer law. That decision can now be further second-guessed in light of the withdrawal of the DOL memos—although to be fair, McDonald’s obviously did not admit liability and considered the settlement to be a good business decision.  The McDonald’s settlement did not set a legal bar, but it surely set a negotiation bar that other Plaintiffs’ counsel will use. But McDonald’s decision to settle should not move the goalposts for franchisors or other purported joint employers in litigation or settlement negotiations—particularly given the fact that momentum appears to be swinging back toward the pre-2015 status quo. 

Finally, the question remains: how should franchisors and franchisees (and those with similar business models) conduct business in the face of the continuing uncertainty over joint employer law: if the part of Browning Ferris’ broad holding regarding the mere potential to control employees, rather than actual control, is upheld, franchisors’ ability to avoid a joint employer tag will be quite limited—the NLRB deliberately cast a very broad net. As a general rule, though, franchisors and franchisees should continue to structure their relationships and agreements such that there is no opportunity for a finding joint employment on the basis of having shared employees (the more common basis for finding a joint employment relationship that predates Browning Ferris). Such agreements should be crafted with the aid of counsel and should make clear, in word and deed, that franchisors do not and will not exercise control over the employees of the franchisee. 

Monte Grix is an attorney in the Los Angeles office of Hirschfeld Kraemer LLP. He can be reached at mgrix@HKemploymentlaw.com, or via the firm’s website.