Restaurant franchisors need to be careful.
The U.S. Department of Labor (DOL) issued guidelines to assist employers, including restaurants that are co-operated or managed by other companies, were recently challenged by a federal district court in New York. Joint employer liability is a doctrine that makes one company liable for the employment and labor obligations of another company under joint control or as a nominally separate operation.
DOL, within its powers, issues rules and guidelines for the interpretation of laws, including the Federal Act on Wages and Hours known as the Fair Labor Standards Act (FLSA). The DOL does not have the authority to make laws, and although its rules are not binding on the courts, the DOL rules can be influential and used by the courts to interpret laws. This latest court ruling may leave employers guessing how to assess their legal status under common employer rules.
On September 8, a judge in the southern district of New York dismissed part of the DOL’s 2020 Joint Employer Rule, after the DOL revised its previous interpretation of the Common Employer Rule. The DOL revised its previous position to narrow down the rule after another federal agency – the National Labor Relation Board (NLRB) – also adopted the Joint Employer Test to expand it and ultimately overturn it in court. As a result, the portion of the DOL’s joint employer that the New York Court has just declared invalid may be the subject of a DOL appeal or further review and refinement by the DOL to comply with the New York Court’s statement.
In January 2020, the DOL reduced the potential for joint employer status by issuing a definitive rule (2020 DOL Rule) that provided a four-factor balancing test where an indirect employer essentially had significant control over the alleged’s employment Employee had to exercise including hiring and dismissing, monitoring, setting pay, keeping records and setting schedules – to create joint liability of the employer.
The DOL rule for 2020, which came into force in March 2020, was a clear departure from the legal interpretation of joint employer liability by the DOL under the Obama administration and from the position of a sister federal authority, the NLRB, in its decision in Browning-Ferris Series of NLRB cases where a lower threshold for joint employment status was given. Both the DOL and the NLRB took the view that direct control of an employee is not necessary. If an indirect employer reserved the opportunity to control the employee, it was sufficient to create joint liability of the employer.
In New York State vs. Scalia, 2020 US Dist. In LEXIS 163498 (SDNY, Sept. 8, 2020), Judge Gregory Woods issued a partial judgment in favor of a coalition of 17 states and the District of Columbia, stating that the 2020 DOL rule was “arbitrary and capricious.” The court found that the 2020 DOL rule inappropriately restricted the employer’s FLSA definition by restricting the FLSA definition.
In the FLSA, “employ” is defined as “suffer or allow”, which is especially true for indirect employers or those without “direct” control. Additionally, Judge Woods stated that the DOL was ignoring the FLSA’s important story, stating that the FLSA’s broad definition of employment was originally designed to prevent a company from evading liability by using middlemen to hire employees , especially in connection with child labor. Judge Woods stated that the 2020 DOL rule ignores this important story.
The court also questioned the reasons for changing DOL’s stance, stating that “if the division deviates from its previous interpretation, it must explain why” and “it must make more than a superficial attempt to cover important costs, including costs to workers, to consider and explain why the benefits of the new rule outweigh these costs. Since the final rules don’t do any of these things, it is legally frail. “In the end, the court concluded that the 2020 DOL rule contradicted the FLSA’s definition of employment, which allows an alleged joint employer to evade liability by not exercising direct control over what becomes one causes considerable harm to an employee.
While the Court rejected the DOL rule 2020 for “vertical employment” (situations in which the employee has a direct employer but is also economically dependent on another employer, for example a subcontractor or a recruitment agency), the court upheld Die 2020 DOL rule only applies to “horizontal employment relationships” (situations where an employee has an employment relationship with two or more “adequately associated” employers that are separate but affiliated companies, e.g. a relationship between franchisor and franchisee).
It remains to be seen whether DOL will appeal the court’s decision or not. Regardless, the new regulation and interpretation means that employers should proceed with caution, especially those involved in a vertical employment relationship. Employers should review their procedures to ensure they comply with the labor laws affected by the Common Employer Rule. In particular, franchisors and franchisees (and those with similar employment relationships) are likely to face additional uncertainty given the recent decision in Scalia.
If the previous DOL guidelines and the Browning-Ferris test (from the NLRB), which allows for the sheer potential to screen workers for joint employer liability, are reintroduced, franchisors and employers in vertical relationships are likely to run the risk of increased liability even if the company has no control over the employees of another company. As a result, vertical workers should structure their employment agreements and arrangements with a lawyer’s advice to minimize the basis for joint liability of the employer. These agreements should be carefully drafted to avoid asserting that one company exercises control or the right to exercise control over the employees of another company, regardless of the relationship between the parties.
Comments are closed.