Risk & Compliance

U.S. Moves to Limit ‘Joint Employer’ Liability

A Labor Department proposal is an "obvious road map" for companies to evade liability for labor law violations by franchisees, a critic says.
Matthew HellerApril 2, 2019

The Trump administration has proposed rule changes that would make it harder to sue companies over labor law violations by their franchisees or contractors.

Under the Labor Department proposal, a company would only be subject to “joint employer” liability if it exercises the power to hire or fire employees, supervises and controls work schedules or conditions of employment, sets pay rates, and maintains employment records.

The Obama administration had taken a much broader view of the joint employment standard over the objections of the business community, which said it threatened the franchise business model and would lead to a spike in lawsuits.

“This proposal will reduce uncertainty over joint employer status and clarify for workers who is responsible for their employment protections,” Secretary of Labor Alexander Acosta said in a news release.

The Obama guidance would have allowed a company like McDonald’s to be held liable for minimum-wage violations committed by a franchisee even if it did not directly supervise workers or hire and fire them.

“If adopted, the [new] rule would likely help fast-food companies and other franchisors who have been sued by workers in recent years for wage-law violations by franchisees,” Reuters said.

As The New York Times reports, the joint employer standard was a way to recover wages for employees of small, poorly capitalized franchise operations by directing litigation at large companies with whom those employers have relationships.

In an example provided by the Labor Department, a hotel franchisor that supplied a franchisee with forms and documents for use in operating the franchise would not be a joint employer because it did not exercise “direct or indirect control over [the franchisee’s] employees that would establish joint liability.”

“Through this proposal, the Department of Labor has the chance to undo one of the most harmful regulatory actions from the past administration,” Matthew Haller, a senior vice president at the International Franchise Association, said.

But Sharon Block, executive director of the Labor and Worklife Program at Harvard Law School, said the proposal was “an obvious road map for employers to evade liability.”