Last week, the United States District Court for the Southern District of New York in the case New York v Scalia invalidated the Department of Labor’s (DOL) recently enacted  joint employer rule, more specifically known as the DOL’s Final Rule defining “joint employers” under the Fair Standards Labor Act (FSLA).

In the franchising context, the joint employer rule is critical because it defines when various forms of liability relating to franchisee employees can be imposed upon both the franchisor and franchisee. The DOL Final Rule lends some much needed clarity to that evaluation.

Derived from the decision of the U.S. Court of Appeals for the Ninth Circuit in Bonnette v. California Health and Welfare Agency, the Final Rule adopts a four-factor balancing test assessing whether the purported joint employer:

      1. Hires or fires the employee;
      2. Supervises and controls the employee’s work schedules or conditions of employment;
      3. Determines the employee’s rate and method of payment; and
      4. Maintains the employee’s employment records.

 

The Southern District’s ruling will be viewed by the franchisor community as a setback, as the question of whether joint employer status has been created will now be determined by the multiple definitions developed by various different courts and state agencies, many of which refer to the National Labor Relations Board (NLRB) previous expanded joint employer rule.

With its Browning-Ferris decision in 2015, the NLRB expanded the joint-employer standard to include companies which merely had indirect control and/or the potential to control another business’s workers, even if that control was never exercised. In the agency’s 2017 Hy-Brand decision, after a change in the composition of the NLRB under the new administration, the NLRB attempted to overrule the standard set forth in Browning-Ferris. However, the Hy-Brand decision was vacated a few months later on procedural grounds, leaving the expansive Browning-Ferris standard in place.

 

The DOL Final Rule was viewed as a final clarification of this confused standard. That Rule is now invalidated and subject to further review.

 

The DOL and various business coalitions (International Franchise Association (“IFA”), the Chamber of Commerce of the United States of America (“U.S. Chamber”), HR Policy Association (“HRPA”), the National Retail Federation (“NRF”), Associated Builders and Contractors (“ABC”), and the American Hotel and Lodging Association (“AHLA”)), will be considering an appeal of the decision in the days ahead; an appeal would go to the Second Circuit. The DOL has 60 days to file this appeal, which means the due date for filing is November 9.

Franchisors and franchisees alike may have questions on how this decision can affect their operations. Pending an appeal of the decision, franchised businesses could potentially again be bound by the expanded joint employer standard that existed prior to the DOL’s new rule and four-factor test.

Pending reversal of this decision by the Second Circuit, the federal court decisions in the different circuits will likely be applied to individual cases. Counsel should be consulted for advice as to specific franchise systems.