January 14, 2020 4 min read

On Monday, the Department of Labor announced it’s rolling back a rule that franchises have long argued is harmful to their business models and the economy. The rule, which expanded the definitions of “joint employment,” meant that franchise employees with wage and labor complaints could argue in court that both the franchisee — their direct employer — and the franchise company were responsible for ensuring fair pay and labor practices. Here are five things you need to know about this ruling and what it means for your business.

The rule is changing as a response to a 2015 Obama administration policy

In 2015 the Obama administration expanded the definition of joint employment, something the franchise industry argued was fundamentally detrimental to their business models. The International Franchise Association applauded this decision in a statement on its website. Research funded by the IFA found that this expanded definition led to a 93 percent increase in lawsuits filed against franchise companies. McDonald’s, for example, has been the subject of multiple lawsuits from employees who claim the company is responsible for ensuring its franchisees adhere to wage laws (a federal appeals court in San Francisco ruled in favor of McDonald’s in October). 

In a Wall Street Journal op-ed on Monday, White House acting chief of staff Mick Mulvaney and labor secretary Eugene Scalia argued that the change will mean “companies will now have greater certainty about the point at which they’re affecting the terms and conditions of employment to such a degree that they’re an employer, responsible for ensuring employees receive the minimum wage and overtime pay.”

However, groups like the Economic Policy Institute, a pro-labor think tank, have argued since the potential rule change was announced last April that it will make it “nearly impossible” for workers to ensure their employers uphold the Fair Labor Standards Act and “will completely take away the ability of workers to recover unpaid wages from firms who use undercapitalized contractors in their work,” the group said in an open letter sent to the DOL in June. 

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It’ll go into effect sooner than you might think

The new rule will go into effect on March 16, 2020, just 60 days after the Department of Labor announced it. Next, all eyes will be on the National Labor Relations Board and the Equal Employment Opportunity Commission to see if they will similarly be rolling back regulations around unfair labor practices and workplace discrimination. 

Joint employment will be determined by four factors

A franchise company will be able to determine if it’s a joint employer by considering four factors:

1. If it can hire or fire employees

2. If it controls employees’ work schedules or working conditions

3. If it sets an employee’s pay

4. If it maintains employment records 

Importantly, it does not need to meet all of these conditions in order to qualify as a joint employer. So, for example, a franchise company that doesn’t control any of those factors will not be considered a joint employer. But as Mulvaney and Scalia gave as an example in the Wall Street Journal, if an office brings on an outside company to handle janitorial services but then closely supervises the employees and their schedules, it will be considered a joint employer. 

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It’ll change the way companies that franchise will have to think about labor

With this change in law, if a franchise company is not considered a joint employer, the responsibility to pay employees minimum wage and overtime will fall solely on the franchisee. Although this could mean that franchise companies will be able to give companies more freedom around hiring, firing and compensating employees, it also means the legal responsibilities to adhere to wage laws will fall solely on the franchisee. 

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Franchisees that provide outsourced employees could see an increase in business

Critics of this rule change have argued that it will lead to companies outsourcing more roles as a way to avoid responsibility for adhering to wage laws. But if you own a franchise offering business services such as temporary staffing or payroll, or if you own a cleaning company that works with corporate clients, this could mean an increase in business for you.