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New Labor Rule Hurts Franchise Employees Seeking to Sue Parent Companies

By Richard Dahl on January 16, 2020

If you're working at a fast-food restaurant and think your employer is violating wage laws, your chances of righting that wrong have diminished as the result of a recent U.S. Labor Department rule.

That rule, set to take effect in March, makes it harder for workers in fast-food restaurants and other franchises to sue parent companies over violations by franchisees.

Because many franchisees and contractors are small operations with limited resources, workers have often directed their efforts to recover wages at deep-pocketed parent companies. McDonald's Corporation, for instance, has been targeted in several high-profile lawsuits. These suits were based on the argument that franchisors like McDonald's Corporation are liable for wage-law violations as "joint employers" of franchise workers.

McDonald's scored a major victory in October, however, when a federal appeals court in San Francisco ruled in its favor in a lawsuit brought by workers who claimed that they were wrongfully denied overtime pay and benefits guaranteed by California law. The court ruled that the McDonald's parent company was not the employer of the 1,400 workers who were hired by Bar Area franchisees and was therefore off the hook.

To Be Liable, Employers Need Direct Control of Employees

While the new rule stops short of throwing out the "joint employment" concept, it makes it much harder for workers to make that claim. Under the new rule, a company can only be considered a joint employer if it hires and fires franchise employees, supervises them, determines their pay, and manages their employment records.

This is a departure from the way joint employment was construed under the Obama administration. Obama's Labor Department took a broader view, saying that a company could be considered a joint employer if it had indirect control over workers, and not just direct control.

Worker advocacy groups are criticizing the new rule, saying that it provides a guide for employers who seek to avoid liability.

Rebecca Dixon, executive director of The National Employment Law Project said in a statement, "The DOL's final interpretation dramatically and improperly narrows companies' joint responsibility for respecting fair pay and child labor laws, exposing millions of workers to wage theft."

While it may be bad news for workers, franchise operators of course have a different view.

The International Franchise Association issued a statement saying that the old rule resulted in a 93% increase in lawsuits against franchise businesses and cost the economy billions of dollars. Robert Cresanti, the organization's president and CEO, lauded the change for "removing the cloud of uncertainty over future franchise operations."

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