Executive Summary: Under the Obama administration, the U.S. Department of Labor (DOL) has aggressively enforced and interpreted the federal wage and hour laws.  The DOL's 2014-2018 Strategic Plan identified securing wages and overtime for "vulnerable workers," defined, in part, as workers in the franchise restaurant industry, as one of its strategic objectives.  Consistent with the DOL's strategic plan, on Wednesday January 20, 2016, the Department of Labor's Wage & Hour Division (WHD) issued an Administrator's Interpretation (AI) that explains and expands its definition of "joint employment." The AI suggests that the WHD will again increase its enforcement efforts, placing more companies under even greater scrutiny and potential liability for compliance with wage and hour laws.  The impact on the franchise restaurant industry could be significant. 

Background

Under the Fair Labor Standards Act (FLSA), an employee can have two or more employers for the work he or she performs. If two or more employers "jointly" employ an employee, the employee's hours worked for all the joint employers during the workweek are aggregated and considered as one employment, including for purposes of calculating whether overtime pay is due. Where joint employment exists, the franchisor and franchisee are jointly and severally liable for noncompliance with the FLSA.     

Impact on the Franchise Restaurant Industry

Through this AI, the WHD expands the definition of "joint employment." It is important to note that the AI is not law.  However, it serves as a guide for the WHD in its enforcement efforts, and some courts may rely on the AI as persuasive authority. 

The AI describes two types of joint-employment arrangements: "vertical" and "horizontal" joint employment. The AI notes that either or both types of employment arrangements can apply to an employer.  The most common scenario in the franchise restaurant industry is "vertical joint employment," in which an employee has a direct employment relationship with the franchisee, and the economic realities show that he or she is economically dependent on, and thus employed by, the franchisor. 

An example of potential horizontal joint employment would involve a bartender who works for two restaurants which have a relationship with each other (for example, common ownership, common management, shared control over operations, or agreements between the two restaurants). In analyzing whether a horizontal joint-employment relationship exists between two potential joint employers, the WHD will analyze whether they:

  • Have shared ownership;
  • Have overlapping officers, directors, executives, or managers;
  • Share control over operations;
  • Have intermingled operations;
  • Involve one potential joint employer supervising the other;
  • Treat employees as a pool of employees available to both of them;
  • Share clients or customers; and
  • Have any agreements with each other.

If the WHD determines that a joint-relationship exists, both employers would be jointly and severally liable for compliance, including payment of overtime compensation for all hours worked over 40 during the workweek.

One example of potential vertical joint employment would involve an employee hired by a franchisee to work at one of the franchisee restaurants. The WHD will now look at the "economic realities" of the employee's relationship with both the franchisee and the franchisor to examine the "economic realities" of the employee's relationship with each entity. 

The WHD examines seven factors when analyzing whether the "economic realities" demonstrate that a vertical joint-employment relationship exists. The more factors the franchisor meets, the more likely it is that the WHD will find a vertical joint-employment relationship between the franchisor and franchisee. 

  • Directing, controlling, or supervising the work performed. The more control and supervision the franchisor has over the franchisee's employee, the more likely it is that there is a vertical joint-employment relationship.
  • Controlling employment conditions. Control over economic conditions indicates economic dependence and therefore joint employment.
  • Permanency and duration of relationship. A longer, more permanent relationship suggests economic dependence and therefore joint employment. 
  • Repetitive and rote nature of work. Rote, repetitive, unskilled work indicates economic dependence and therefore joint employment. 
  • Integral to business. If the employee's work is integral to the business, that indicates economic dependence and therefore joint employment. 
  • Work performed on premises. If the employee performs work on the premises of the potential joint employer, this indicates economic dependence and therefore joint employment.
  • Performing administrative functions commonly performed by employers. If the franchisor performs administrative functions such as payroll and workers' compensation insurance, this indicates economic dependence and therefore joint employment.

Like in the horizontal employment situation, if the WHD determines that a joint-relationship exists, both the franchisor and the franchisee would be jointly and severally liable for compliance, including payment of overtime compensation for all hours worked over 40 during the workweek.

The purpose of issuing the AI was "to achieve statutory coverage, financial recovery, and future compliance, and to hold all responsible parties accountable for their legal obligations." In other words, it was issued to expand the reach of the wage and hour laws, to require companies to pay more money to employees and the WHD, to bring companies into compliance with the wage and hour laws, and to increase the number of companies who will be obligated to pay for violations of the wage and hour laws.

Employers' Bottom Line

In light of the WHD's recently issued guidance, franchisors and franchisees should carefully evaluate their relationships under the WHD's "vertical joint-employment" framework.  To the greatest extent possible, franchisors should avoid actual or apparent control over the terms and conditions of employment between franchisees and their employees.