At the end of July 2021, the U.S. Department of Labor (DOL) implemented a final rule to rescind the “Joint Employer Status under the Fair Labor Standards Act,” also known as the Joint Employer Rule, which first published in January 2020 under the Trump administration. This action should come as no surprise if you are familiar with this rule and legal issue. The rule received backlash and was confronted with legal objections not long after it was established.

This rescission, which takes effect on Sept. 28, 2021, will eliminate the regulations put into place in March 2020, which attempted to explain under which circumstances two or more entities could be considered “joint employers” for purposes of liability under the Fair Labor Standards Act. The Department of Labor’s action is part of the continuing process by the Biden administration to disestablish many of the employer-friendly implementations from the Trump administration.

The Background

In order to understand the attitudes leading up to the DOL’s rescission of the March 2020 rule, it is vital to highlight the rule’s implications and the legal challenges it faced at inception. The rule specified the conditions under which entities could be defined as joint employers under the Fair Labor Standards Act. In so doing, it honed in on the actual application of control by an employer over an employee. The rule essentially instituted a four-factor test used to decide whether an entity is a joint employer under the Fair Labor Standards Act.

  1. If the employer can hire or fire the employee.
  2. If the employer supervises and controls the employee’s work schedule or conditions of employment to a substantial degree.
  3. If the employer determines the employee’s rate and method of payment.
  4. If the employer maintains the employee’s employment records.

The purpose of the four-factor test was to determine direct control and defined aspects of working relationships. As a result, it offered guidance to companies undertaking joint ventures or involved in staffing contracts that involved the use of a workforce that is minimally or widely shared.

Joint employment has been an extremely polarizing issue in employment law over the last three presidential administrations. On one side of the aisle, advocates have argued that employers were routinely using shared labor or independent contractors which would eliminate or diminish certain legal obligations otherwise that would be owed to employees (such as health insurance or other benefits), yet still maintaining significant control over those workers. By the very nature of this application, franchise companies were swept into the broad scope of guidance from the Obama administration, which declared a joint employment relationship based on an “economic realities” test, focusing on how a worker and employer interacted with one another and what freedoms were necessary for the worker to be independent, compared to the controls the company had over the worker.

When first introduced, the Joint Employer Rule was viewed as a positive development for entities that wanted to steer clear of employment status. It was initially well-received by many employers and industries, including franchising. However, soon after its inception, several states joined forces and filed a lawsuit designed to render the rule invalid on the basis that it was both fickle and in strong contrast with the law.

As a result of the aforementioned suit, a Federal Court in New York determined on Sept. 9, 2020 that the Joint Employer Rule contrasted the law by virtue of its impermissibility in regard to narrowing the definition of who could be an “employer” under the Fair Labor Standards Act.

Although the repercussions of the ruling were unclear at the time, the current rescission sheds light on the long-term effect of such ruling and the relationship to the legal challenges that the rule initially faced.

New developments

Since the final confirmation that the Joint Employer Rule will be rescinded, employers should no longer be reliant on the rules, regulations and standards implemented under the Trump administration.

Despite the Department of Labor’s current lack of commitment to a new direction, there are signs indicating the Biden administration will prioritize the process of making worker classification standards more all-encompassing.

It remains possible the DOL will return to the broader test for assessment of the classification of a joint employer that was issued under the Obama administration.

What action should employers take?

In general, employers should keep in mind the prospect of future proposals for regulation to replace the Joint Employer Rule and should utilize this rescission to examine their own classification applications in compliance with the corresponding laws. It is vital to be clear about the obligations and liabilities by virtue of being a potential joint employer.

The impact on franchising

It remains to be seen what the current administration will ultimately do with respect to the Fair Labor Standards Act and the question of joint employment. One thing is certain, franchisors and franchisees need to be educated on this issue. Many franchisors, franchisees, and industry trade organizations were staunch opponents of the rescission of the Joint Employer Rule, believing its implementation offered clear guidance on when joint employment may or may not exist. As a result of the current uncertainty, franchisees in the Dunkin’ system and beyond must be diligent to ensure compliance with all employment laws or rules, even as they continue to evolve.

Justin M. Klein is a founding partner of Marks & Klein LLP, a nationally recognized franchise focused law firm with offices in New Jersey, New York City, Chicago and Boca Raton.