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Labor Law: Feds Call Off Their War on Franchising and Subcontracting

Summary:
The U.S. Department of Labor has announced a final rule (press release, fact sheet, FAQ) backing off one of the Obama administration’s most damaging initiatives, its attempt to redefine a wide range of franchise, subcontract, and supplier business models as “joint employment.” The effect of that move would have been to make many companies liable for breaches of labor and employment law committed by their franchisees or contractors. The final rule is set to take effect on March 16, 2020. This is an important win for economic freedom, as well as for the legal reality that a supply or contractual relationship between two firms is by no means the same thing as a merger between them. It is also a victory for regulatory modesty. The Obama rules had pushed hard at (and arguably overstepped) the

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The U.S. Department of Labor has announced a final rule (press release, fact sheet, FAQ) backing off one of the Obama administration’s most damaging initiatives, its attempt to redefine a wide range of franchise, subcontract, and supplier business models as “joint employment.” The effect of that move would have been to make many companies liable for breaches of labor and employment law committed by their franchisees or contractors. The final rule is set to take effect on March 16, 2020.

This is an important win for economic freedom, as well as for the legal reality that a supply or contractual relationship between two firms is by no means the same thing as a merger between them.

It is also a victory for regulatory modesty. The Obama rules had pushed hard at (and arguably overstepped) the bounds of the New Deal-era Fair Labor Standards Act so as to rope in as employment many relationships that Congress had never chosen to include as such. The push had been a multi-agency affair, extending to ostensibly independent federal bodies such as the National Labor Relations Board (NLRB) and others; and the retreat is likewise multi-agency, as can be seen in an NLRB case last month in which the board confirmed that McDonald’s does not, in fact, employ the employees of McDonald's franchisees.

The new four-part balancing test announced by the Trump labor department assesses, to quote directly, 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; and
* maintains the employee’s employment records.

Whatever else can be said about this framework, it at least seems likely to return the scope of the rules to the same general neighborhood they occupied for decades up to 2015.

Most of all, to quote our 2015 description, the new rule beats a retreat from the past administration’s aim “to force much more of the economy into the mold of large-payroll, unionized employers, a system for which the 1950s are often (wrongly) idealized.” That very same goal is at the root of California’s unfolding debacle with AB5, a law that tries to force many lines of freelancing into a direct-employment model and is already harming large numbers of workers it had purported to help.

If some progressives at the federal level continue to pursue this paradoxically backward-looking agenda, they will need to do so through the front door, by working in Congress to enact different standards into law.

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