The expansion of American franchise operations has long fueled job growth, with employment in the businesses increasing 3.4 percent since 2012, compared with 2 percent elsewhere. From the model’s success sprung a debate, which intensified during the Obama administration: Just who is responsible for all these workers?
For decades, franchisers relied on the opposite — that franchisees, who essentially operate as small-businesses owners, are solely liable for the people they hire. The nonbinding Obama-era guidance that inched away from that convention has now vanished from the Labor Department’s website, providing some relief to pro-business circles and irking some worker’s rights groups.
The removal of the guidance doesn’t change the law. But it signals a stark reversal from the previous administration's efforts to “expand the application of the laws it enforced to the maximum extent possible,” said Alexander Passantino, a Washington employment lawyer.
“A lawyer — or a court — can no longer point to the interpretations and say, ‘This is what the DOL believes,’ ” he said in an email.
The Labor Department also emphasized in a statement Wednesday that employees who feel they are being treated unfairly can still seek legal recourse.
“Removal of the administrator interpretations does not change the legal responsibilities of employers under the Fair Labor Standards Act and the Migrant and Seasonal Agricultural Worker Protection Act, as reflected in the department’s long-standing regulations and case law,” the statement read. “The department will continue to fully and fairly enforce all laws within its jurisdiction.”
In the United States, workings are increasingly entering into employment relationships with more than one party. Hotel, restaurant and gym franchises employ about 7.6 million people.
In 2015, the National Labor Relations Board, an independent body charged with protecting workers' rights in the private sector, asserted that companies with “indirect” control over employees, or two firms that “codetermine” terms of employment, qualify under federal law as “joint employers.” Lawyers took that to mean that both franchiser and franchisee, who both maintain some level of control over employee practices, were responsible for making sure workers made a legal wage and received appropriate overtime pay.
That opened the door for litigation. Last year, a group of McDonald’s employees in California who said they were owed overtime pay sued the corporation — rather than just the individual franchise owner — and walked away with a $3.75 million settlement.
Business leaders slammed this outcome. They argued that opening up corporations to blame for an individual franchise owner’s behavior would create more uncertainty, raise the price for entrepreneurs trying to get into the business and ultimately quash employment opportunities.
The American Action Forum, a right-leaning think tank, estimated that upholding the NLRB standard would result in a franchise slowdown that could slash 1.7 million jobs from the private sector.
David Weil, an Obama administration appointee who led the Labor Department’s wage and hour division, said the Obama-era guidelines didn't change existing statutes, and should not affect job growth.
“It doesn’t change anything in regards to joint employment,” he said. “It was guidance to help employers, and taking it away makes things more opaque.”
Heidi Ganahl, founder of Camp Bow Wow, a webcam-equipped day care for dogs, said the Labor Department’s thinking tore down the wall between franchiser and franchisee.
“We had 40 people at corporate, and we had 4,000 people working at franchises,” said Ganahl, who sold the day-care business in 2014 but still serves as an adviser. “All of a sudden we had 4,000 employees to manage.”
The company responded to the potential change in regulatory culture by turning to investors with deeper pockets — who could run several locations at once — rather than taking a chance on a small-business owner, she said.
Ganahl added that individual franchise owners had an interest in maintaining good working conditions.
“You just don’t do well in business,” she said, “if you don’t treat them well.”