Labor Department’s Proposed ‘Joint Employer’ Rule Poses Unnecessary Challenge to Franchise Small Businesses

Now more than ever, the perseverance of the franchise community is on trial. As Congress considers H.R. 842/S. 420, the Protecting the Right to Organize (PRO) Act, an unwanted Executive agency development poses another unnecessary challenge for franchise businesses and the millions of workers they employ.

On July 29th, the U.S. Department of Labor (DOL) rescinded a final rule issued under the Trump administration that provided clarity about the otherwise esoteric definition of "joint employer" under the Fair Labor Standards Act (FLSA). The rescission of the rule means it is more likely that an employer (franchisor) will be held to be a ‘joint employer’ and thus liable under the FLSA for another employer's (franchisee) actions.

Courts are now likely to return to the application of various (and not always consistent) multi-factor tests derived from the cases interpreting the Department’s outdated 1959 standard, spurring less certainty for employers as to when they may be liable for wage and hour violations under the FLSA as a ‘joint employer’ of an unrelated company’s employees.

There are over 740,000 U.S. franchises that employ over 7.5 million workers. Usually, the strength of franchising is the value of the brand, and franchises set standards to ensure quality and, thus, protect and enhance the brands. Franchisees determine who to hire and fire, wage rates and benefits, and work schedules. The new joint employer standard would mean that franchisees lose their independence and the franchisors’ heavy monitoring, control and negotiating costs would likely slow the growth of franchises and their employment.

Franchising is a proven job-creating mechanism that provides opportunities for countless women, veterans, minorities, and recent immigrants to pursue an entrepreneurial career.  We are a diverse community that proudly represents a 30.8% minority entrepreneurship rate – 12% higher than non-franchised establishments. However, an expanded joint employer standard would present a roadblock to the wealth, and job creation in our communities. In fact, a standard put forward by the Obama Administration in 2016 has already cost about $33 billion per year in litigation which prevented the creation of 376,000 new jobs. For many franchisees, an expanded joint employer standard lead to increased costs, less equity, and less support from their brands

Fortunately, there is a permanent solution to this uncertainty. Senator Roger Marshall (R-KS) and Representative James Comer (R-KY) have introduced H.R. 3441/S.1636, the Save Local Business Act (SLBA), a bill that would provide a surgical amendment to the FLSA and National Labor Relations Act to make clear that an employer may be considered a ‘joint employer’ in relation to an employee only if such employer “directly” and “immediately” exercises significant control over the essential terms and conditions of employment. This legislation is backed by over 65 organizations representing millions of workers that would be harmed by a tighter joint employer standard from the Biden Administration or in the PRO Act.

America’s small businesses – franchise or otherwise – have borne a heavy burden during this pandemic. These businesses, which are part of the fabric of so many communities, have worked diligently to serve their customers, employees, and communities. Now they deserve some clarity in the law. As the franchise sector plays its part in our nation’s recovery, it is up to Congressional leaders to protect the freedom of franchise business owners and their employees from harmful regulatory overreach.