New Proposal Limits Ability of Employees to Sue Franchise Companies

The U.S. Department of Labor (DoL) announced on April 1, 2019, that it plans to limit the ability of employees to pursue claims against companies based on the actions of their franchise owners or contractors.  While employees could still take legal action against their local franchise holder or contractor, the new proposal would prevent them from including the franchisor as part of their lawsuit.   This limitation could significantly affect the ability of employees to collect damages for violations of overtime and minimum-wage laws.

Four Factors Will Determine Whether Joint Employment Is Applicable

The DoL proposal establishes four factors used to determine joint-employment status between franchises and franchisees.  Franchise companies must engage in most of these activities to be considered joint employers with the local franchise locations:

•    The franchisor has and uses its power to hire and fire employees at the local franchises.
•    It sets schedules and has supervisory responsibility for employees.
•    The franchisor maintains employment records for individual franchise locations.
•    It sets pay rates for employees.

Franchise companies that do not engage in this level of management with their local franchises would necessarily be immune from claims against them based on the actions of their franchise locations.

The Franchise Paradigm

Large franchises like McDonald’s, SUBWAY and KFC hold varying degrees of control over their franchise holders, which allows the franchise to protect its reputation and its brand for the benefit of all franchises.  Because of this control, the U.S. has historically recognized the filing of lawsuits that included both the local franchise owner and the franchise itself for minimum-wage violations and other employment issues.  This policy was outlined most recently in 2016 when the DoL specifically stated that franchises could be held liable as a joint employer for infractions committed by the local franchise owner.

Added Protections for Big Business

The DoL proposal would provide an added level for protection for some of the largest businesses in the U.S.  By preventing lawsuits against the parent franchise for the actions of the individual franchise locations; the move would reduce the liability for these corporations.  The DoL announcement was greeted with approval by the International Franchise Association. The president of that organization stated that the proposed rule “creates certainty for America’s 733,000 franchise businesses.”

Reduced Protections for Workers

For those employed by franchise locations, however, this proposed rule change would reduce their ability to collect meaningful compensation for illegal actions taken by their employers.  Many franchise locations operate on a smaller profit margin than their upstream franchisors.  This rule could limit the amount that could be collected by employees who have been negatively affected by the policies of these companies.

At Risman & Risman, we specialize in providing zealous and effective representation for employees in the New York City area.  Our employment law team is committed to helping our clients achieve their goals and in providing tailored solutions for a wide range of employment issues.  We offer competent strategies and caring representation for cases of discrimination in the workplace and other employment law violations.  Call our offices today at 212-233-6400 to schedule a free consultation with our team.  We are here to work for you.