Joint employer: What proposed rule means for franchises
 
Joint employer: What proposed rule means for franchises
05 APRIL 2019 7:47 AM

The U.S. Department of Labor has proposed a new rule that would clarify joint employer status under a stricter standard, a welcome change for hoteliers on both sides of the franchise model.

REPORT FROM THE U.S.—The proposed changes by the U.S. Department of Labor’s Wage and Hour Division rules on joint employer relationships would benefit the hotel industry if they go into effect, sources said.

However, before hoteliers start celebrating, they should understand what exactly the proposed changes mean (and don’t) for their businesses.

In a news release announcing the proposed changes, the Department of Labor explained the Fair Labor Standards Act allows for situations in which two companies are jointly responsible for employees’ wages. The purpose of the proposed changes is to set out a four-part test to clarify when a joint-employer relationship exists. The test would consider whether a potential joint employer exercises the power to:

  • hire or fire an employee;
  • supervise and control employees’ work schedules or conditions of employment;
  • determine employees’ rates and method of payment; and
  • maintain employees’ employment records.

The proposed changes from the Wage and Hour Division would only apply to complaints regarding employee pay, such as minimum wage, overtime and child labor, said Andria Ryan, a partner in the Atlanta office of law firm Fisher Phillips. This is a separate standard than the one under review by the National Labor Relations Board, she said.

The NLRB standard applies to collective bargaining and unfair labor practices, she said. Similarly, the Equal Employment Opportunity Commission has its own standards for determining joint-employer status in discrimination and harassment complaints, she said.

These different standards apply to every company, she said, but the standard applied depends on the claim made.

“That’s the beauty of employment law,” she said.

Having a joint-employer standard under indirect control meant that when there are multiple layers of participants in an employer relationship, one or multiple entities are responsible, Ryan said.

“They want to cast that net very wide and put as many of them on the hook as possible for possible wage and hour violations,” she said. “(The proposed changes) are saying there’s probably one employer, and we will figure out who it is.”

Even under a more restrictive test for joint-employer status, more than one company can be considered the employer, she said. If a hotel company hires a staffing agency that has little supervisory responsibility and acts more like a payroll service, the hotel company likely could be considered a joint employer because it would be scheduling the temporary employees alongside the regular employees and might have a say in who is hired and who is fired, she said.

What lies ahead
Before the changes can go into effect, the Department of Labor will hold a public comment period for 60 days that should see a great deal of activity, said Dana Kravetz, firm managing partner at Michelman & Robinson.

The general feeling was the rule under the Obama administration was extreme, he said, and the latest proposal dialed it back. However, the test is “pretty restrictive,” so he’s uncertain whether it will come through unchanged, he said.

This is an example of another administrative body under the Trump administration working to unwind what was in effect under the Obama administration, he said. Before anyone gets too comfortable, they should remember they don’t know what will happen in the 2020 election, he said.

Between now and the next presidential election, the proposed rule changes are likely to be attacked by plaintiffs’ attorneys for being too restrictive, he said. The four-part test is akin to a standard set in a 1983 9th Circuit Court decision, but other courts, even within the same circuit, ruled differently, so opponents could argue this test was cherry-picked, he said.

“Where is it going?” he asked. “Court, where it will be battled in litigation, as it always is. We will get more rulings out of the court system and get more guidance from that.”

Who it would benefit
The clear benefactor from the proposed changes would be franchisors, which in the hotel industry are the major brand companies, Kravetz and Ryan said. Franchisors aren’t interested in being responsible for the wages or other liabilities that go along with managing hotel employees under the franchise model, so having a clear test that sets a direct control standard for joint employment frees them up when working with franchisees.

Under the direct control standard, a franchisor’s willingness or desire to require that franchisees have a comprehensive sexual harassment prevention plan in place is not enough to show the franchisor is exerting direct control, Kravetz said. A franchisor that steps in to investigate a claim and fire an employee for violating the policy would, however, be exerting direct control, he said.

“It does give the franchisor the ability to put in standards,” he said. “There’s a uniformity in how franchisees are operated. There’s a level of protection that doesn’t lead to a finding of joint employment.”

The silver lining for the franchisee with a direct control standard is the added value of more comprehensive oversight from the franchisor, he said. Under an indirect control standard, the franchisor might take a more hands-off approach and not offer any help at all, he said. With direct control, the smaller operators can receive more assistance from a franchisor that doesn’t need to worry about creating a joint-employer status, he said.

The direct control standard could also benefit owners and operators who use a staffing agency for any of their labor needs, such as housekeeping or some night services, Ryan said. Unless the owners and/or operators are exerting any form of direct control over these temporary employees, they don’t need to worry about liability for any wage and hour violations, she said.

“An operator on that level would find benefits with their staffing and contractor relationships here,” she said.

The standard might be helpful outside the franchise agreement in creating clarity over responsibility when establishing the relationship between an owner and a third-party management company, she said.

Industry reaction
Asian American Hotel Owners Association Interim President and CEO Rachel Humphrey said in a statement that America’s hoteliers are pleased with the Department of Labor’s proposed rule change to bring clarity to the franchise business model.

“For an entity to be considered a joint employer, they must have control over working conditions,” she said in the statement. “Making the four-part test outlined in the proposed rule part of the FLSA will help clarify joint employment status. We look forward to the public comment period and encourage hoteliers and small business owners who employ the franchise business model to seize this moment to make their voices heard on this important matter.”

Joint-employer issues have been a focus for Choice Hotels International and the franchising industry for some time now, said Rolf Lundberg, head of public policy and general counsel at Choice. It’s a matter of ensuring small businesses and small business franchise owners can continue to thrive, he said.

“At the end of the day, like most businesses, small businesses need certainty,” he said. “They can’t thrive and they can’t grow if they have a cloud of uncertainty over their business model. An expanded and potentially unlimited joint-employer standard is a heavy cloud of uncertainty for franchised small business owners.”

The wrong joint-employer standard undermines the franchise business model because it conflates the franchisor and franchisee roles, Lundberg said.

“In our view, the right standard simply recognizes that the franchisee owns the business and makes the employment decisions,” he said. “A typical franchise owner is a small business person and likes having the security of the franchise system around him but not over him.”

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