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Momentum Gains As Eight States Enact Laws Protecting Franchisors Against Joint Employment In 2017

Published by on July 26, 2017

The national trend toward expansion of joint employment standards continues, but states are taking action with franchisor protection legislation, and more are likely to follow.

The national trend toward expansion of joint employment standards continues, but states are taking action with franchisor protection legislation, and more are likely to follow.

In recent years, courts and agencies have vastly expanded the standard for finding a company to be a joint employer. This trend is particularly concerning to franchisors, who allow franchises to be operated as independent businesses while providing uniform standards, assistance, and oversight to maintain their brand. Expanding employer liability or relaxing the standards for finding an employer relationship at a minimum threatens the level of assistance franchisors will feel comfortable providing thus lowering the customer experience and, at worst, threatens the franchising model itself. Fortunately, many states have stepped in to enact new laws providing some measure of protection to franchisors.

The trend toward increased employer liability has been multifaceted. Most notably, the National Labor Relations Board’s 2015 Browning-Ferris Industries decision redefined the Board’s standard for joint employment, holding that a parent company or franchisor will be considered a joint employer even if it only reserves the right to exercise indirect control over an employee but has not done so. Prior to the decision, a company was required to actually control an employee to be a joint employer. Having been appealed and argued, a decision by the U.S. Court of Appeals for the District of Columbia Circuit is forthcoming. Franchisors across the country are anxious for a reversal of this broad standard.

Additionally, in April 2014, David Weil, the economics professor and author of “The Fissured Workplace,” was confirmed as the head of the Department of Labor’s Wage and Hour Division, where he pushed for a new, broader interpretation of joint employment. His book examined the role of contractors, subcontractors, and franchises and argued that the expansion of these arrangements in recent decades has harmed workers’ wages and lowered compliance; his January 2016 Administrator’s Interpretation completely redefined the agency’s standards for joint employment and explicitly stated that “the concept of joint employment, like employment generally, should be defined expansively under the [Fair Labor Standards Act (FLSA)] and [Migrant and Seasonal Agricultural Worker Protection Act (MSPA)].” However, Weil’s policy victory was short-lived: with a new Administration and Labor Secretary, the DOL withdrew this guidance in its entirety on June 7, 2017.

And in January 2017, the Fourth Circuit, which covers Maryland, North Carolina, South Carolina, Virginia, and West Virginia, announced a new test for joint employment, holding that joint employment depends on “whether two or more persons or entities are ‘not completely disassociated’ with respect to a worker such that the persons or entities share, agree to allocate responsibility for, or otherwise codetermine —- formally or informally, directly or indirectly —- the essential terms and conditions of the worker’s employment.” Salinas v. Commercial Interiors, Inc., 848 F.3d 125, 151 (4th Cir. 2017). This case is merely the latest around the country to expand the standard for liability; the acceptance of the “economic realities test” over the “control test” has been a long-running, nationwide expansion. As discussed here before, DIRECTV has filed an appeal to United States Supreme Court in a case where the Salinas standard was applied against it. Hall v. DIRECTV, LLC, 846 F.3d 757 (4th Cir. 2017). Whether the Supreme Court will accept the invitation to decide the applicable legal standard for determining joint employment under the Fair Labor Standards Act (FLSA) and provide some national uniformity remains to be seen.

Even without the push to expand employer liability, the standard for whether or not a joint employment relationship exists varies by jurisdiction and statute, creating a web of different tests, factors, and interpretations that have become nearly impossible to navigate, especially for companies operating in more than one state. The result has been for franchisors to err on the side of caution and unnecessarily abstain from exerting traditional, valid, brand-protecting control over the operation its franchises, allowing franchises to not necessarily be operated at a level franchisors should be permitted to expect without fear of liability.

Recognizing this distressing trend, many states have begun passing legislation to prohibit franchisors from being held joint employers. In the last three years, sixteen states have enacted laws protecting franchisors, with eight coming this year alone, and many more are likely to follow. Most of the laws that have been enacted simply codify in no uncertain terms that a franchisor is not an employer or co-employer of either a franchisee or an employee of the franchisee, unless the franchisor has agreed. A few of the enacted laws, however, have allowed for an employer-employee relationship to exist where the franchisor exercises a degree of control over the franchisee’s employees that is not customarily exercised by franchisors.

In 2015, franchisor protections were enacted in Louisiana, Tennessee, and Texas. In 2016, Indiana, Michigan, Oklahoma, Utah, and Wisconsin added the law to the books. And this year, the trend has continued in Arizona, Arkansas, Georgia, Kentucky, North Carolina, North Dakota, South Dakota, and Wyoming, with bills currently pending in Alabama and New Hampshire. It expected that even more states will continue to consider and enact franchisor protection laws in the coming years.

Welter Insight

The state legislative action to prevent franchisors from being held to be the employers of franchisee employees is encouraging, especially given the trend at other levels, but it is of limited effect. These statutes will only apply for claims brought under state law; claims brought under the numerous federal statutes will not be affected. Franchisors must be aware of the various applicable standards for determining joint employment within each jurisdiction in which they operate, as well as how courts have treated the various acts of control that franchisors exert, to avoid potential liability and costly litigation.

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