New “joint employer” rules make it easier for franchise owners to understand their responsibilities under the federal Fair Labor Standards Act.

The final rule from the Department of Labor limits situations in which franchisors and franchisees are considered “joint employers” of workers under the act.

It modifies a policy, enacted under the Obama administration, that potentially made a franchisor liable for the failure of a franchisee to pay overtime or minimum wage, even if the franchise operated as a legally independent business.

The rule covers scenarios in which an employee works for one business, but another entity or individual benefits from the work at the same time.

Businesses that have typical contracting and franchising relationships say that the rule allows them to require certain standards from their suppliers or franchises without being considered the employer of the other business’s workers.

However, labor groups argue that the rule makes it harder for employees to fight overtime or minimum wage violations.

Determining if a person or an entity qualifies as a joint employer depends on whether that person or entity has the power to:

• hire or fire the employee;
• supervise and control the employee’s work schedule or conditions of employment to a substantial degree;
• determine the employee’s rate and method of payment; and
• maintain the employee’s employment records.

A determination of whether a person or entity is a joint employer depends on the facts of each case, and different weights are given to each factor, depending on the situation.

Under the rule, operating a business as a franchisor or entering into a brand and supply agreement or using a similar business model is considered not relevant to joint employer status. Also considered not relevant:

• a potential joint employer’s contractual agreements with an employer requiring the employer to comply with its legal obligations or to meet certain standards to protect the health or safety of its employees or the public;
• potential joint employer’s contractual agreements with an employer requiring quality control standards to ensure the consistent quality of the work product, brand, or business reputation; and
• potential joint employers’ practice of providing an employer with a sample employee handbook, or other forms, allowing the employer to operate a business.

Here are some examples that clarify when an entity is a joint employer:

Example 1: A franchisor provides franchisees with a sample employment application, sample employee handbook and other forms for use in operating the franchise. According to the licensing agreement, the franchisee is solely responsible for hiring and firing, setting pay rates, supervising employees and maintaining employment records.

In this case, the franchisor would not be considered a joint employer. Providing sample forms and documents does not constitute direct or indirect control over a franchisee’s employees.

Example 2: A cook works for two different franchisees of the same national franchise. The two local establishments do not coordinate with respect to the employee.

In this case, the restaurants are not considered joint employers, because they are not acting in each other’s interest in relation to the cook.

Example 3: A country club hired a landscaper on contract to maintain its grounds. While the club does not have authority to supervise landscaping employee work under the contract, there is an employee of the club who supervises the work, instructs on tasks and keeps some records of the work. In addition, the club employee reports an employee of the landscaper who failed to follow directions, and he or she is then fired
In this case, the country club is a joint employer, because the club employee exercises sufficient control over the terms and conditions of the landscaping employee’s employment.

Example 4: A cook works for two different restaurants with the same owner. The restaurants coordinate the cook’s hours and decide jointly on the cook’s hourly rate.

This is considered a joint employment relationship under the rule, because there is common ownership and there are joint decisions about the cook’s schedule and pay rate.
Example 5: A big company imposes a code of conduct and a minimum wage on suppliers for those suppliers to be part of the company’s supply chain.

That does not lead to a joint employer relationship, because the company does not exercise sufficient direct or indirect control over supplier employees.

Businesses should consult attorneys for help reviewing all licensing agreements and vendor contracts for any requirements related to control over employee work, pay rates and responsibility for record-keeping. Actual staff practices must also be reviewed for possible exposure to joint employer liability.