President Biden has delivered on the promise he made during his presidential campaign for more employment protections for workers. This presidential transition has brought about significant changes to the composition and leadership of federal agencies, including the National Labor Relations Board (NLRB) and the Department of Labor (DOL). The NLRB now consists of a Democratic majority led by Chairman Lauren McFerran, which will continue to pursue a pro-union agenda. As to the DOL, Martin Walsh – who as Mayor of Boston helped secure a statewide $15 per hour minimum wage, paid sick leave and paid parental leave – was previously appointed as Secretary of Labor.

With these organizational changes, come changes in labor law. Since President Biden’s inauguration, the DOL has, among other things, rescinded the Trump era joint employer rule, published a new rule on tip regulations, and discontinued the Payroll Audit Independent Determination program.

In addition, the House of Representatives passed the Protecting the Right to Organize Act (PRO Act) in March. Supporters believe it will level the playing field between labor and big business owners, facilitate union organizing, and pave the way for wage equality. Opponents of the PRO Act say it will hurt workers’ rights, create labor disputes, increase wages in a manner that will disrupt the economy (and franchising in particular), and force employees to join unions and pay union dues. The PRO Act now appears stalled in the Senate and Democrats are trying to insert some of the PRO Act provisions into the President’s signature Build Back Better Act, which also includes comprehensive paid family and medical leave.

Franchisees are concerned the PRO Act’s push to unionize franchises will have unintended consequences on local entrepreneurs and small businesses seeking to operate under a national brand, all but preventing national brands from partnering with small businesses. Of particular significance to franchise owners, the PRO Act would codify the joint employer standard set forth in the 2015 Browning-Ferris Industries of California case, in which the NLRB adopted a much looser standard whereby it considered “indirect control” to be the main factor in determining whether a joint employer relationship existed under the National Labor Relations Act.

The PRO Act would also modify the test for “independent contractor” status by essentially codifying the ABC Test, the three-part test that determines who is an independent contractor. Under the ABC Test, which is used in states like California, Connecticut and Massachusetts, a worker is considered an independent contractor if: (A) the worker is free from the control and direction of the hiring entity in connection with the work’s performance; (B) the worker performs work that is outside the usual course of the hiring entity’s business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Those who oppose the ABC Test believe, in the context of franchising, it could convert franchisees that believe they are independent business owners into employees, which could result in massive class action misclassification lawsuits for wages, benefits and other unfair labor practices. The U.S. Senate is contemplating a vote on the PRO Act, but its future remains uncertain—as does the future of the independent contractor rule.

The updated rule proposed in January focused on two factors – who had control over the work performed, and who took on the risk for profit or loss. Those factors would likely have made it easier to classify workers as independent contractors, but the proposed change has ping-ponged around the halls of Washington all year. Most recently, the DOL withdrew the new rule, explaining it was “inconsistent with the Fair Labor Standard Act’s (FLSA) text and purpose, and would have had a confusing and disruptive effect on workers and businesses alike due to its departure from longstanding judicial precedent.” The result has been confusion and exasperation across the country.

DOL says its “longstanding prior guidance” remains in effect, until it publishes a new rule addressing independent contractor classification. For now, worker status will continue to be assessed under the “economic realities test,” of the relationship between the worker and the principal and weighs a number of factors, including:

1. The extent to which the services rendered are an integral part of the principal’s business.

2. The permanency of the relationship.

3. The amount of the alleged contractor’s investment in facilities and equipment.

4. The nature and degree of control by the principal.

5. The alleged contractor’s opportunities for profit and loss.

6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.

7. The degree of independent business organization and operation.

Some worry the “economic realities” test will cause more workers to be classified as employees rather than independent contractors. That could impact franchisors significantly because many franchisees, who formerly fell within the definition of an independent contractor, could become employees entitled to FLSA-mandated wages and benefits, including overtime pay.

Many franchisees fear that the liabilities for such wages and benefits would be harmful to the viability of the franchise model. Considering the impact franchising has on employment in this country, threats to the model would seem counter to the goals of a pro-labor president. •

 

Glenn Duhl is a management-side employment and litigation lawyer at Zangari Cohn Cuthbertson Duhl & Grello P.C. You can reach him at gduhl@zcclawfirm.com.