American labor laws, such as the Fair Labor Standards Act and the National Labor Relations Act, give employees a number of protections from their employers — wage and hour restrictions, the right to unionize, etc. But oddly enough, they’re not too clear on who counts as the employer of a given worker, leaving that issue to be settled by the executive and judicial branches. That question can be difficult in some situations, such as those involving contractors or “franchise” businesses such as McDonald’s. McDonald’s makes business decisions that affect individual restaurants, but it does not actually own those restaurants or hire and fire the restaurants’ employees.
Traditionally, in the case of franchises, individual restaurants and the like were usually considered the workers’ employers. But in 2015 and 2016, via actions from the National Labor Relations Board and the Department of Labor, the Obama administration drastically increased the chance that a franchisor would be considered a “joint employer” of workers hired by franchisees; the criteria in these policies included whether workers were “economically dependent” on the company and whether the company could “indirectly” control working conditions. This meant businesses such as McDonald’s could be held liable for their franchisees’ labor violations. The International Franchise Association, an industry group, claims this resulted in a 93 percent increase in lawsuits against franchise companies — and several high-profile suits took aim at McDonald’s itself.
As you can imagine, the Trump administration is working to roll this back. Its Department of Labor (DOL) rescinded Obama’s “guidance” document regarding joint employers back in 2017, and now the department has finalized an update to the underlying regulations — which have not been meaningfully revised in more than half a century, don’t reflect key court decisions, and don’t even speak to some of the issues most relevant in franchise cases. (They are focused more on how joint employers relate to each other than on how they relate to the employees in question.) The National Labor Relations Board is expected to have a big announcement about its treatment of joint employers soon too.
The new DOL rule, which will guide how the department applies the Fair Labor Standards Act, more or less rearticulates the joint-employer test spelled out by the Ninth Circuit in the widely cited 1983 case Bonnette v. California Health & Welfare Agency. The four key elements determining whether someone is a joint employer will be whether he: “(1) Hires or fires the employee; (2) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (3) determines the employee’s rate and method of payment; and (4) maintains the employee’s employment records.”
Now, this is a balancing test where no single element is dispositive, and there will be some subjectivity in its application. The rule says that other factors will be relevant in some circumstances too. But each prong of the test is quite clear by itself, and as a whole the test unambiguously allows companies to use a franchise business model without taking responsibility for everything an individual franchise owner does.
Rolling back the Obama approach is the right move for several reasons.
The first is the simple matter of moral culpability. If I reach a deal with McDonald’s that allows me to own and operate a restaurant that uses its brand and sells its products — but requires me to handle, among much else, staffing and labor matters — there’s no reason that McDonald’s should be liable if I break the law in executing my side of the bargain.
Second, as many pointed out when the Obama administration started changing its standards, the franchise business model is an important part of the American economic landscape and should not be made overly burdensome. Franchises simplify entrepreneurship, allowing someone to, for example, start a restaurant without creating the recipe for each menu item from scratch, buying television ads, etc.
Third, there’s a real economic impact to making franchising more difficult and legally risky. The White House’s Council of Economic Advisers has suggested that the Obama joint-employer rules could create “ more than $5 billion in annual net costs.”
Ideally, Congress itself would step in and clarify the rules for joint employers in the statute books, rather than leaving the issue to a maze of guidance documents, regulations, and court decisions. But this is second-best: Trump is getting rid of ill-advised changes the previous administration made, returning to a simple standard that worked for decades, and updating regulations that have long been obsolete.