The Wage and Hour Division Addresses Joint Employer Status
On January 21st, 2016, the Department of Labor’s Wage and Hour Division (the “WHD”) released its interpretation on the joint employer question. Though the WHD’s interpretation does not address franchising specifically, it provides a worrisome structure that may have direct implications for the franchise model.
In the view of the WHD, joint employment may exist when an employee of one employer (referred to as an “intermediary employer”) is also, with regard to the work performed for the intermediary employer, economically dependent on a potential joint employer (“Vertical Joint Employment”). In the franchise context, this could render a franchisee’s employee the employee of the franchisor.
In Vertical Joint Employment situations, the potential joint employer typically has contracted or arranged with the intermediary employer to provide it with labor and/or perform for it some employer functions, such as hiring and payroll. There is typically an established or admitted employment relationship between the employee and the intermediary employer. That employee’s work, however, is typically also for the benefit of the other employer. Unfortunately the present administration at the WHD considers franchisors as the beneficiaries of their franchisees’ (the intermediary employer) employees and thus potential Vertical Joint Employers.
In analyzing for Vertical Joint Employment, the WHD will not follow the “right to control” test we saw in Browning-Ferris; instead, the WHD will be using the seven-factor “economics realities test.” The economic realities test serves to answer the following question: as a matter of economic reality, is the employee “economically dependent” on the potential joint employer? The WHD will use the following factors to make the determination:
(i) Directing, Controlling, or Supervising the Work Performed. The extent a potential joint-employer’s control or oversight of an employee is “beyond a reasonable degree of contract performance oversight, such control indicates economic dependence.
(ii) Controlling Employment Conditions. To the extent the potential joint employer can hire or fire the employee, modify employment conditions (e.g., hours), or determine the rate or method of pay, such control indicates economic dependence.
(iii) Permanency and Duration of Relationship. An indefinite, permanent, full-time, or long-term relationship by the employee with the potential joint employer indicates economic dependence.
(iv) Repetitive and Rote Nature of Work. The employee performing repetitive, rote, and unskilled work that requires little to no training indicates economic dependence.
(v) Integral to Business. If the employee’s work is integral to the potential joint-employer’s business, then that factindicates economic dependence.
(vi) Work Performed on Premises. The employee’s performance of the work on a premises owned or controlled by the potential joint employer indicates economic dependence.
(vii) Performing Administrative Functions Commonly Performed by Employers. To the extent the potential joint employer performs administrative functions for the employee, such as handling payroll, providing workers’ compensation insurance, providing necessary facilities and safety equipment, housing, or transportation, or providing tools and materials required for the work, those facts indicate economic dependence.
Finally, as a potential “catch-all” provision, the WHD notes these factors are non-exhaustive and any other factors may indicate economic dependence. The WHD also notes that these factors should be interpreted broadly and in a manner that does not lose sight of “the expansive definition of employment.”
Before applying the economic realities test, the WHD will ask if the intermediary employer (e.g., the franchisee) is an employee of the franchisor. If so, then all employees of the franchisee will automatically be deemed employees of the franchisor.
A copy of the Administrator’s Interpretation can be found here: http://www.dol.gov/whd/flsa/Joint_Employment_AI.pdf.
The Interpretation also discusses “Horizontal Joint-Employers,” which likely will not concern most franchise relationships.
At the ABA Forum on Franchising in October, the head of the WHD assured us and the other lawyers that he had no particular view on the franchising model generally. The memo itself does not directly address the franchising. However, this interpretation has clear implications. It will control the wage and hour provisions of various federal statutes (minimum wage, overtime, etc.) over which the WHD has regulatory authority and could be applied to franchises. Further, in practice, this analysis will have much broader scope as other agencies and plaintiff’s attorneys seek to hold franchisors responsible for more and more of the acts of their franchisees by using the “economic realities” analysis. Certain courts, such as the 3rd Circuit Court of Appeals, still rely on a variation of the “right to control test” in analyzing a joint-employer relationship, but this interpretation may influence change. The law in this field is still developing, though clearly trending in concerning ways.
We’ll continue to monitor developments and provide assistance to mitigate our clients’ risk going forward. In the meantime, do not hesitate to contact us if you have any questions or concerns.
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