On July 29, 2021, the US Department of Labor announced that it was repealing a final rule released last year (2020 Final Rule) that sought to clarify the standard for finding two separate entities as “co-employers” under the Fair Labor Standards Act. (FLSA). The 2020 Final Rule was a welcome development for franchise businesses, as it limited the circumstances under which a franchisor and independent franchisees could be considered joint employers of employees of franchisees and expressly made it clear that the typical franchise model did not render more likely co-employer status.
Unfortunately, the Ministry of Labor’s revocation of the 2020 Final Rule and its common sense standard for determining joint employment under the FLSA makes it more likely that a franchisor and franchisee can be considered employers. spouses of the employees of the independent franchisee.
The Ministry of Labor’s 2020 Final Rule
The FLSA requires employers to pay their non-exempt employees at least the federal minimum wage for every hour worked and overtime for every hour worked above 40 in a work week, among other things. The Department of Labor has long recognized that two or more entities may sometimes “jointly” employ a single employee under the FLSA. Each joint employer is jointly responsible for the employee’s salary. Under Department of Labor regulations implemented in 1958, more than one entity can be an employee’s joint employer if they are “not completely separate” from the employee’s job.
Seeking to interpret the “not completely dissociated” standard, federal courts across the country have developed several different multi-factor tests to assess joint labor claims under the FLSA. Some courts ask whether a particular employee is “economically dependent” on a deemed joint employer, while other courts focus on the relationship between the two deemed joint employers. The result of these different tests is that companies operating in multiple jurisdictions may face joint employer liability in one jurisdiction, but not another, for the same business practices.
In early 2020, the Department of Labor updated its 1958 regulations interpreting when multiple entities can be held liable as “co-employers” under the FLSA. Seeking to promote greater consistency in court decisions and predictability for organizations and employees, the 2020 Final Rule established a four-factor balancing test that assesses whether the putative co-employer: (1) is hiring or terminates the employee; (2) to a large extent supervise and control the employee’s work schedule or conditions of employment; (3) determine the rate and method of remuneration of the employee; and (4) keep the employee’s employment records. No factor is decisive. The 2020 Final Rule clarified that a potential co-employer must effectively exercise, directly or indirectly, control over the affected employee to be jointly liable under the FLSA, and that the alleged “economic dependence” of a potential co-employer is irrelevant. A boon to franchisors and franchisees, the 2020 Final Rule further explained that a company’s business model, including franchising in particular, does not make co-employer status more likely under the FLSA. .
With its focused scope and practical guidance, Final Rule 2020, which came into effect on March 16, 2020, restricted the circumstances under which a franchisor could be considered a joint employer of employees of its independent franchisees.
Legal battles and cancellation
Shortly after the 2020 Final Rule came into effect, attorneys general for seventeen states and the District of Columbia challenged it in federal court. States argued that the clarified standard of the 2020 Final Rule was too narrow, the Ministry of Labor had unacceptably deviated from the precedent, and the Ministry of Labor had failed to consider significant costs. incurred by States. In New York v. Scalia, the Southern District of New York agreed and, at the end of 2020, struck down most of the final 2020 rules as arbitrary and capricious. The decision is currently under appeal to the Second Circuit Court of Appeals.
Meanwhile, the change in presidential administration brought new direction to the Ministry of Labor and, with it, further attacks on the 2020 Final Rule. After first posting a regulatory proposal notice in March 2021 , the Department of Labor issued a new final rule on July 29, 2021 repealing the 2020 final rule. The Department of Labor argued that the 2020 final rule conflicted with the language of the FLSA and deviated from previous guidelines . The cancellation will officially come into effect on September 28, 2021.
As the Labor Department repeals the 2020 Final Rule and its clarified four-factor test, it hasn’t announced any new analysis or standards to replace it. As a result, courts across the country will continue to apply their various, not always consistent, multifactorial tests in FLSA cases. The absence of a clear standard makes it more likely that a franchisor can be considered a “co-employer” of the employees of its franchisees and therefore jointly liable under the FLSA for the actions of its independent franchisees.
Joint work standards continue to evolve, and franchisors and franchisees need to keep abreast of current developments in this area in order to best assess the risks of joint work claims in their franchise systems.