As the franchise industry's attention has been focused on the new and expanded joint-employer initiative by the NLRB, another development is emerging from the DOL. This important DOL initiative hasn’t received much public attention so far, but is likely to have significant financial implications for many employers, particularly those in the retail, hospitality, restaurant and healthcare industries, with particularly ominous signs for those who franchise in these industries. As DOL pursues its enforcement efforts at a franchisee level, these new regulations add another dimension of legal risk for the franchising industry.

DOL has proposed a rule that, if promulgated, more than doubles the annual salary required for an employee to be considered exempt from overtime or minimum wage under the Fair Labor Standards Act (FLSA)  white collar exemptions. Eliminating a duties test on defining which jobs are exempt, the proposal seeks to increase the current minimum salary requirement for the executive, administrative, professional, outside sales, and certain computer employee exemptions from $455 per week ($23,660 per year) to $970 per week ($50,440 per year). The proposed rule also seeks to increase the threshold for exemption as a “highly compensated employee” from $100,000 to at least $122,148. The DOL projects that the new regulations will eliminate the exempt status for approximately 21.4 million employees.[1] 

Although the rule was expected to go into effect before the end of this year, the timing is now less certain, given the upcoming presidential elections and recent public statements by DOL Solicitor Patricia Smith. At this juncture, we expect the final rule to go into effect some time in late 2016, and we will provide an update once DOL has set a definitive effective date. Accordingly, employers are well advised to immediately assess the potential impact on their annual budgeting processes and evaluate how to best align their workforces to comply with the regulations.

Clearly, this change will likely have a significant financial impact on many employers’ businesses. Steps should be taken now to identify positions currently classified as exempt that might no longer be exempt under the new higher minimum salary threshold. For employees who may no longer qualify as exempt white-collar employees under the proposed new DOL regulations, consideration will need to be given to whether it is practical to give raises to meet the new threshold, reclassify employees as non-exempt and pay overtime, or limit employees’ hours to fewer than 40 per week. Further, in several affected industries (including the hotel industry), there may be union implications that will need to be figured into the analysis.

There has been an explosion of employment-related litigation in recent years. Since 2004, the number of FLSA cases filed in federal courts has more than doubled, and the DOL’s Wage and Hour Division also has increased its compliance audits and investigations of wage complaints more recently. Many plaintiffs’ class action law firms focus on employment matters, and the DOL’s proposed changes will likely only trigger more activity by private litigants, as well as investigations and actions by federal and state agencies.

These proposed new rules affect the franchise industry in two ways. First, with respect to one’s own employment ranks,  the proposed rules could have a significant effect on one's overall labor costs. Planning should be undertaken now to minimize the negative impact, including consolidating positions, reclassifying employees and/or hiring more part time employees.

Second, given the challenges the franchise model is facing with respect to potential joint employer liability, the proposed rules may open the door for significantly higher liability risks relating to claims of employee misclassification occurring at a franchisee level. This means that franchisors face a difficult choice. Remain silent towards the franchise system – for fear that doing otherwise might be viewed as a factor in joint employer liability. Alternatively, franchisors can be proactive, at least once the regulations have been finalized, and advise franchisees of the change, raising the specter of a joint employer relationship by doing so.

To what extent will providing information and guidance to franchisees increase joint employer liability risks? Each franchisor will need to make its own assessment, keeping in mind the structure and nature of its franchise program. However, if a franchisor/franchisee relationship were ever challenged based on a joint employer theory, the fact that franchisees were advised on the change in law should not be determinative of a joint employer finding. Thus, on balance, it may be advisable under normal circumstances to make your franchisees aware of the potential change in law at the appropriate time.

See the DOL Wage and Hour Division Notice of Proposed Rulemaking here.