On Sunday, Jan. 12, the U.S. Department of Labor issued a final rule on liability for franchisors and companies that outsource services to staffing agencies. The new rule, which replaces a policy put in place by the Obama administration, makes it harder for employees to prove that these companies are legally responsible when a franchisee or staffing firm fails to pay the minimum wage or overtime.
The rule involves what are called “alternative work arrangements,” meaning those that differ from the traditional employer-employee relationship. According to the Associated Press, an estimated 14 million American workers are in non-traditional work relationships, at least to some extent.
The new rule touches on responsible how third-party hirers are when it comes to the behavior of an intervening company. For example, it clarifies when the McDonald’s Corporation can be held liable for the wage and hour violations of McDonald’s franchisees. Similarly, it applies to the liability of a company that outsources some employees when their staffing agency fails to pay the wages required by law.
The question comes down to who is the employer
If a company like McDonald’s Corporation is to be held liable for the unlawful wage payment of a franchisee, it would have to be considered a joint employer with that franchisee. This means that it would have to exert a certain amount of control over how that franchisee treated its workers. When should a company be considered a joint employer?
The new rule, taking effect on March 16, envisions a four-part test for when companies should be considered joint employers:
1. Can the company hire or fire employees?
2. Does the company supervise the employee’s work schedule?
3. Does the company set the employee’s pay?
4. Does the company maintain employment records?
According to a senior official at the Labor Department, a company does not need to meet all the tests for it to be considered a joint employer. Nor does the company’s business model determine whether it is a joint employer.
Under the previous rule, factors like the company’s business model and whether the employees were central to that model were also taken into account.
Franchisor group the International Franchise Association, welcomed the new rule. It complained that the Obama-era rule caused an increase in the number of wage and hour claims against franchisors. Meanwhile, a pro-labor group called the Economic Policy Institute pointed out that the new rule provides an incentive for companies to outsource.
It is likely that the new rule will result in fewer franchisors being held liable for wage and hour violations allegedly committed by their franchisees.