Employers that have franchise operations, engage independent contractors, or both have had the rules and protections that come with these business relationships turned on their heads in recent years. A newly proposed 4-factor test may simplify things.

During the Obama Administration the National Labor Relations Board (NLRB) as well as the U.S. Department of Labor (DOL) sought to erase the lines between these independent business relationships by re-interpreting the existing laws and regulations to make it easier to establish a joint employment relationship. A finding of joint employment between the “parent” organization and the employees of the franchise operation (or the case of a customer-vendor relationship, the vendor company) puts compliance and legal liability responsibilities on the “parent” organization.

A major purpose behind the Obama Administration’s attempts to change interpretation of corporate rules of division was to make it easier to control the actions of all the business parties. From the government’s side of this issue, it was to hold the more influential party, the larger parent company, accountable for the actions of its sub-level business “partners”.

The Trump Administration’s DOL is now working to re-establish some of the previous and long practiced regulations as law through regulatory rule change. The goal is to clarify regulations and re-establish the separate legal roles of the different business parties. To do this the DOL is formally proposing a new 4-factor test to clarify the responsibilities of employers and joint employers. This would be the first change to these regulations since the 1950’s and would make it more difficult to re-interpret the law on this.

The four factors the new DOL rules propose to determine if a joint employment relationship exists are:

• Which party can hire and fire the employee

• Which party supervises and controls the employee’s work schedule or conditions of employment

• Which party determines the employee’s method and rate of payment

• Which employer maintains the employment records

From the DOL’s revised point of view, this 4-factor test would better ensure employers would understand which of the parties in either a franchise set-up or a vendor-customer relationship, would be responsible for the workers’ employment protections and compliance responsibilities. More specifically these protection and compliance responsibilities are employee safety, payment of at least minimum wage and overtime, recordkeeping, and more.

The new rules provide examples of possible joint employment and how the new four factors apply:

Nationwide Restaurant Franchise - An individual works 30 hours per week as a cook at one restaurant establishment and 15 hours per week as a cook at a different restaurant establishment affiliated with the same nationwide franchise. These establishments are locally owned and managed by different franchisees that do not coordinate in any way with respect to the employee. Are they joint employers of the cook?

Under these facts, the restaurant establishments are not joint employers of the cook because they are not associated in any meaningful way with respect to the cook’s employment. The similarity of the cook’s work at each restaurant, and the fact that both restaurants are part of the same nationwide franchise, are not relevant to the joint employer analysis, because those facts have no bearing on the question whether the restaurants are acting directly or indirectly in each other’s interest in relation to the cook.

Same Owner, Multiple Restaurants - An individual works 30 hours per week as a cook at one restaurant establishment and 15 hours per week as a cook at a different restaurant establishment owned by the same person. Each week, the restaurants coordinate and set the cook’s schedule of hours at each location, and the cook works interchangeably at both restaurants. The restaurants decided together to pay the cook the same hourly rate. Are they joint employers of the cook?

Under these facts, the restaurant establishments are joint employers of the cook because they share common ownership, coordinate the cook’s schedule of hours at the restaurants, and jointly decide the cook’s terms and conditions of employment, such as the pay rate. Because the restaurants are sufficiently associated with respect to the cook’s employment, they must aggregate the cook’s hours worked across the two restaurants for purposes of complying with the act.

Contracted Janitorial Services - An office park company hires a janitorial services company to clean the office park building after hours. According to a contractual agreement with the office park and the janitorial company, the office park agrees to pay the janitorial company a fixed fee for these services and reserves the right to supervise the janitorial employees in their performance of those cleaning services. However, office park personnel do not set the janitorial employees’ pay rates or individual schedules and do not in fact supervise the workers’ performance of their work in any way. Is the office park a joint employer of the janitorial employees?

Under these facts, the office park is not a joint employer of the janitorial employees because it does not hire or fire the employees, determine their rate or method of payment, or exercise control over their conditions of employment. The office park’s reserved contractual right to control the employee’s conditions of employment does not demonstrate that it is a joint employer.

Contractual Landscaping Services - A country club contracts with a landscaping company to maintain its golf course. The contract does not give the country club authority to hire or fire the landscaping company’s employees or to supervise their work on the country club premises. However, in practice a club official oversees the work of employees of the landscaping company by sporadically assigning them tasks throughout each workweek, providing them with periodic instructions during each workday, and keeping intermittent records of their work. Moreover, at the country club’s direction, the landscaping company agrees to terminate an individual worker for failure to follow the club official’s instructions. Is the country club a joint employer of the landscaping employees?

Under these facts, the country club is a joint employer of the landscaping employees because the club exercises sufficient control, both direct and indirect, over the terms and conditions of their employment. The country club directly supervises the landscaping employees’ work and determines their schedules on what amounts to a regular basis. This routine control is further established by the fact that the country club indirectly fired one of the landscaping employees for not following its directions.

Besides trying to exercise better control over those employers that engage in franchising and/or subcontracting, the DOL is also trying to clarify and streamline many different sets of rules and tests being used (and confused) by employers and their business partners. To its credit, this new 4-factor test seems to be easier to apply than some of the other older tests. For example, HR professionals should all remember the 20-factor common law test that the IRS has used. Even if the DOL joint employer test is adopted, employers will still have to be cognizant of their state’s tests that are out there for purposes of determining possible workers compensation or unemployment compensation liability. Many states use variations of what is called an Economic Control Test to determine whether joint employer liability exists.

Employers are advised to work with qualified legal counsel to review existing vendor agreements. Employers that run franchise operations should be working with legal counsel that understands not only the franchise business model but what parts of the contract may need to keep the business relationship within the bounds of “franchise” law.

Employers are invited to comment on these new proposed rules and can do so electronically at www.regulations.gov in the rule making docket RIN 1235-AA 26.

Sources: DOL NEWS 4/2/2019 Proposed joint employer rules includes 4-factor test: hiring and firing, supervision and control, payment and recordkeeping.