U.S. Moves to Limit Wage Claims Against Chains Like McDonald’s

on Apr2
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The Labor Department released a proposal on Monday that would limit claims against big companies for employment-law violations by franchisees or contractors.

The proposal seeks to define when, for example, employees of a locally owned McDonald’s restaurant could challenge the McDonald’s Corporation over compliance with minimum-wage and overtime laws.

The proposal, which will require a 60-day public comment period before it can be finalized, could affect the ability of millions of workers to pursue wage claims under a concept called joint employment.

Franchisees and contractors can be small, poorly capitalized operations, complicating efforts to recover wages that were illegally denied. Instead, those efforts are often directed at large companies with whom those employers have relationships.

“This proposal will reduce uncertainty over joint employer status and clarify for workers who is responsible for their employment protections,” the labor secretary, Alexander Acosta, said in a statement.

[In an abrupt shift, McDonald’s said last week that it would no longer lobby against minimum-wage increases.]

The proposal is a sharp departure from the joint-employer criteria that the Labor Department laid out in 2016 under the Obama administration. Under those guidelines, a company like McDonald’s could be held liable for minimum-wage violations committed by a franchisee even if it did not directly supervise workers or hire and fire them. Exerting some forms of indirect control — like providing software or developing policies on which a franchisee relies — could make the larger corporation liable.

The Obama Labor Department also argued that corporations could be joint employers even without exercising control over a franchisee or contractor, simply because the smaller companies were economically dependent on them — for example, because the “upstream” company at the top of the supply chain provided facilities and handled payroll for a contractor.

The new proposal substantially restricts the situations in which a franchiser like McDonald’s would be considered liable. In an example laid out by the Labor Department, a global hotel brand would not be held liable for minimum-wage and overtime violations that a local franchisee committed, even if the franchisee relied on a variety of material provided by the hotel chain, such as sample employment applications and sample employee handbooks.

“Through this proposal, the Department of Labor has the chance to undo one of the most harmful regulatory actions from the past administration and replace it with a rule that creates certainty for America’s 733,000 franchise businesses,” Matthew Haller, a senior vice president at the International Franchise Association, said in a statement.

“An expanded joint employer standard has held back tens of billions of dollars in economic output each year due to a proliferation of frivolous lawsuits, precipitating significant changes to the way franchise brands interact with their local owners,” he said.

According to the new proposal, four factors are involved in establishing joint employment: whether the upstream company exercises the power to hire and fire employees, whether it supervises them and controls their schedules, whether it sets their pay and whether it keeps up their employment records.

If a company doesn’t engage in most or all of these activities, it is unlikely that it would be deemed a joint employer.

Critics accused the department of laying out a step-by-step guide to employers seeking to get off the hook for violations even when they have substantial control over workers hired by their franchisees and contractors.

“It has provided such an obvious road map for employers to evade liability,” said Sharon Block, a former top official in the Obama Labor Department who is executive director of the Labor and Worklife Program at Harvard Law School. “But that’s going to introduce tremendous uncertainty into the lives of American workers who are subject to these business models.”

Ms. Block said that the legality of the regulation was likely to be challenged once it was finalized, and that courts could refuse to be bound by it.

The proposal comes at a moment of political peril for Mr. Acosta, who has been dogged by allegations that his office negotiated an unduly lenient plea agreement in a sex-trafficking case while he was the United States attorney in South Florida more than a decade ago. The defendant, the financier Jeffrey E. Epstein, was accused of sex offenses involving girls as young as 14 but pleaded guilty to more minor prostitution charges.

Some Democrats have called for Mr. Acosta’s resignation, and some Republicans have called for investigations into the matter.

Mr. Acosta has been viewed as especially vulnerable partly because a constituency that can normally be rallied to support a Republican labor secretary — business groups and management lawyers — has complained that he has been slow to step back from important Obama-era policies and offer alternatives that are friendlier to business.

A Labor Department spokeswoman defended the agency’s record, citing data showing that it achieved the second-largest cost savings of any department through its deregulatory efforts during the last fiscal year, behind the Department of Health and Human Services.

Some of those employer concerns have subsided after Labor Department efforts in recent weeks, first with a plan on overtime eligibility, which signals a partial retreat from an Obama-era rule that a court had struck down, and now with the joint-employer proposal.

The latest proposal is part of a broader debate, also playing out at the National Labor Relations Board, over when employers should be held liable for violations committed by franchisees and contractors.

Because the board oversees the right to unionize and take other types of collective action, its joint-employer doctrine determines whether companies are liable when, say, a franchisee illegally fires a worker in retaliation for trying to organize a union.

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