The Labor Department released a proposal on Monday that would limit claims against big companies for employment-law violations by franchisees or contractors.
The proposal, related to a concept called joint employment, seeks to define when, for example, employees of a locally owned McDonald’s restaurant could successfully take action against the McDonald’s Corporation over violations of minimum-wage and overtime laws.
The proposal, which will require a 60-day public comment period before it can be finalized, could affect the ability of millions of workers pursuing wage claims. Franchisees and contractors can be small, poorly capitalized operations, which can complicate efforts to recover wages that were illegally denied. Instead, those efforts are often directed at large companies with whom those employers have relationships.
“This proposal will reduce uncertainty over joint employer status and clarify for workers who is responsible for their employment protections,” the labor secretary, Alexander Acosta, said in a statement.
The proposal is a sharp departure from the joint employer criteria that the Labor Department laid out in 2016 under the Obama administration. Under that guidance, a company like McDonald’s could be held liable for minimum-wage violations committed by a franchisee even if it did not directly supervise workers or hire and fire them. The fact that McDonald’s may exert some forms of indirect control over the franchisee — which may rely on software provided by the company and incorporate policies that the company developed — could make the larger corporation liable.
The Obama Labor Department also argued that corporations could be joint employers even without exercising control over a franchisee or contractor, simply because the smaller companies were economically dependent on them — for example, because the “upstream” company at the top of the supply chain provided facilities and handled payroll for a contractor.
The new proposal substantially restricts the situations in which a franchiser like McDonald’s would be considered liable, however. In an example laid out by the Labor Department, a global hotel brand would not be held liable for minimum-wage and overtime violations that a local franchisee committed, even if the franchisee relied on a variety of material provided by the hotel chain, such as sample employment applications and sample employee handbooks.
“Through this proposal, the Department of Labor has the chance to undo one of the most harmful regulatory actions from the past administration and replace it with a rule that creates certainty for America’s 733,000 franchise businesses,” said Matthew Haller, a senior vice president at the International Franchise Association, an industry group.
“An expanded joint employer standard has held back tens of billions of dollars in economic output each year due to a proliferation of frivolous lawsuits, precipitating significant changes to the way franchise brands interact with their local owners,” he said.
According to the new proposal, four factors are capable of establishing joint employment: whether the upstream company exercises the power to hire and fire employees, whether it supervises them and controls their schedules, whether it sets their pay and whether it keeps up their employment records.
If a company doesn’t engage in most or all of these activities, it is unlikely that it would be deemed a joint employer.
Critics accused the department of laying out a step-by-step guide to employers seeking to get off the hook for violations even when they have substantial control over workers hired by their franchisees and contractors.
“It has provided such an obvious road map for employers to evade liability,” said Sharon Block, a former top official in the Obama Labor Department who is executive director of the Labor and Worklife Program at Harvard Law School. “But that’s going to introduce tremendous uncertainty into the lives of American workers who are subject to these business models.”
