The Trump Administration announced a final rule setting forth standards for determining joint employer status under the Fair Labor Standards Act (FLSA), a rule that has been sought by franchisers and companies that employ contract workers.
The new rule from the Department of Labor, which will become effective in 60 days, is a departure from a legal interpretation adopted by the Obama Administration in 2016 and a 2015 ruling by the National Labor Relations Board (NLRB) that expanded joint employment situations and made it easier for workers to sue their employers.
The new DOL rule, while not legally binding, does guide consideration of whether companies are classified as joint employers of workers and thereby can be held responsible for labor violations including requirements on minimum wage and overtime pay. The rule can affect franchising companies, contractors, temporary staffing, cleaning agencies and similar firms.
The issue has been central to several cases involving the chain McDonald’s and whether it can be held liable for alleged labor violations in its franchisees’ restaurants. Last month McDonald’s won a 2-1 victory before the current NLRB with Trump appointees—agreeing to pay $170,000 to settle workers’ claims against its franchisees but also winning a ruling that frees it from direct responsibility as a joint employer.
The Obama administration had backed worker advocacy groups in the litigation against McDonald’s.
The Obama standards for determining whether there is joint employer status themselves departed from long-standing precedent and made it easier for workers to sue their employer.
In its final rule, the Trump DOL provides a four-factor balancing test for determining FLSA joint employer status in situations where an employee performs work for one employer that simultaneously benefits another entity or individual. The balancing 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.
A business would not have to meet all of these criteria to be considered a joint employer.
The rule also sets forth 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.
In a decision known as Browning-Ferris Industries, the NLRB in August 2015 overturned established precedent for determining whether a joint employer relationship exists under the National Labor Relations Act. Legal guidance adopted by the Obama DOL in 2016 reflected the expansion of joint employer liability cited in the Browning-Ferris ruling. For example, it considered a franchiser a joint employer not only if it exercised direct control of employees’ activities, but also if it had “indirect” or even “potential” control.
The Trump DOL withdrew the Obama guidance in 2017.
Writing in the Wall Street Journal, DOL Secretary Eugene Scalia and White House Chief of Staff Mick Mulvaney said the new rule should clarify the situation affecting these relationships and relieve companies of a potential liability.
“The new rule also gives companies in traditional contracting and franchising relationships confidence that they can demand certain basic standards from suppliers or franchisees—like effective antiharassment policies and compliance with employment laws—without themselves being deemed the employer of the other company’s workers. That will help companies promote fair working conditions without facing unwarranted regulatory costs,” the Trump officials wrote in the Wall Street Journal.
The International Franchise Association (IFA) praised the new rule as a “return to a simple, clear, and thoughtful joint employer standard.” IFA has argued that the Obama standard increased lawsuits against employers, cost jobs and sapped the American economy of $33.3 billion per year.
Robert Cresanti, IFA president and CEO, said the four-part test to determine employer status can clarify joint employer status, employer liability, and the roles and responsibilities of each party in a business relationship.
Worker groups have argued that a narrowing of the rule will create an incentive for large employers to outsource more jobs.
Rebecca Dixon, executive director of the National Employment Law Project, said the new rule “makes it easier for corporations to cheat their workers and look the other way when workplace violations occur.”
The liberal Economic Policy Institute has said workers could lose $1.3 billion in wages annually under the new rule.
There is more to come on the issue from the Trump Administration. While the DOL standards are not legally binding, the NLRB joint employer rule is. The NLRB is close to finalizing its own rule.
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