Franchises such as Checkers and others could experience a growth spurt following changes in Department of Labor regulations that had not been updated in more than 60 years. Courtesy Checkers
The franchise industry is doing a happy dance this month, according to one of its CEOs.
Jania Bailey — CEO of Louisville, Kentucky-based FranNet, a franchise ownership consulting business with 48 North American franchisees, including some in greater Grand Rapids — spoke to the Business Journal this month about the U.S. Department of Labor’s (DOL) final ruling updating the Fair Labor Standards Act’s (FLSA) joint employer regulations.
She said the rule takes the fear out of being a franchisor by adding more specific qualifications for what it means to be a “joint employer.”
The term is defined by the DOL as “additional individuals or entities that are jointly and severally liable with the employer for the employee’s wages,” potentially including back pay, damages and legal fees if a franchise employee brings suit.
The new rule adds a four-factor test for determining FLSA joint-employer status in situations where an employee performs work for one employer that simultaneously benefits another entity or individual. The balancing test examines whether the potential joint employer:
Hires or fires the employee
Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree
Determines the employee’s rate and method of payment
Maintains the employee’s employment records
Bailey said in past years, she and other CEOs of the 4,000 existing franchised U.S. brands had to walk a tightrope in their relationships with franchisees, being careful not to create too strong a link between corporate and affiliated establishments for fear of incurring liability, even going so far as to avoid advising on group insurance plans or putting associated franchisees on the corporate website for appearances’ sake.
“We are absolutely thrilled with the new ruling. It has restored some clarity associated around that. It’s been very scary the last few years with the ruling that was in place under the previous administration because it really destroyed the franchise model in terms of the protection and the separation,” she said.
According to the Jan. 12 DOL press release explaining the new rule, the regulations interpreting joint-employer status under the FLSA had not been “meaningfully updated” in over 60 years, although the Obama-era DOL head took a more labor-friendly stance in interpreting the previous guidance.
In December, the National Labor Relations Board (NLRB) — an independent federal agency with members appointed by the president and approved by Congress — foreshadowed the DOL ruling by determining that “an employer may be considered a joint employer of a separate employer’s employees only if the two employers share or co-determine the employees’ essential terms and conditions of employment, such as hiring, firing, discipline, supervision and direction,” according to a statement at nlrb.gov.
Following the NLRB’s new policy, McDonald’s on Dec. 12 won a seven-year legal battle in which the federal labor board determined the corporation does not share responsibility for alleged labor violations in its franchisees’ restaurants, a decision that an agency judge referred to as the “largest case ever adjudicated” in NLRB history, although McDonald’s only paid $170,000 to settle the case.
Bailey said the decision is powerful because it validates a long-felt certainty on the part of corporate franchisors that the actions of its independent operators and their employees should not fall back on the franchisor, which takes no part in decisions made at the local level but rather provides licensing, policy and branding for individual locations.
“This is a breath of fresh air to get us back where we should be, and it will allow the franchisors and franchisees to work together and promote franchise employees without the fear of the repercussions,” she said.
She added that one estimate showed the previous guidance resulted in a 93% increase in lawsuits against franchise businesses, costing the economy over $33.3 billion per year and leading to 376,000 fewer job opportunities.
Bailey said it also resulted in the expensive decision on the part of many franchisors to buy out their independent franchises to absorb the liability by means of exerting greater control.
Following the new DOL ruling, Bailey said joint employers are more likely to be limited to and defined as corporate parents with multiple branches in various states, such as banks, manufacturers, etc., that already have a level of control over the local offices.
She said she is willing to bet new franchises will pop up all over following the ruling — not just consulting businesses or restaurants, but also window cleaning businesses, home repair services, fitness studios and a wide variety of other concepts.
“It takes away the fear. Now, I think what you’re going to see is franchising once again will very aggressively start expanding. I think a lot of franchises kind of went into a holding pattern because it was like, ‘Why continue to grow and just increase my liability in situations where I have no visibility of what might be a problem and I’m not involved in?’ … With this clarity put in place and the commonsense tests put in place, people can feel free again to expand and grow and allow more people to come into their franchise."