Compliance Alliance Raises Fear of Joint-Employment Liability

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By Ben Penn

A restaurant chain joined the Labor Department in a partnership to improve wage and hour compliance at its 27,000 franchised stores, creating a potential industry template but raising joint-employment issues.

Under a voluntary agreement announced Aug. 1, the Labor Department’s Wage and Hour Division said it would meet regularly with officials of the privately held Subway IP Inc. to share enforcement data and explore how franchisees may use scheduling and payroll technology to avoid overtime violations.

The negotiations were guided by a pair of bottom lines: Subway insisted that it must not face added risk of Fair Labor Standards Act joint-employer liability, while the Labor Department needed to retain enforcement authority over Subway franchisees, said David Weil, administrator of the Wage and Hour Division.

In Some Cases, No Guarantees

The agency attempted to reach similar terms with other franchisers and hopes the Subway arrangement motivates more companies to step forward, Weil told Bloomberg BNA. However, those other businesses have yet to agree to a deal because the Labor Department would not commit to shielding them from liability under other statutes, such as the National Labor Relations Act, said Matthew Haller, a senior vice president for communications at the International Franchise Association.

The association and other business groups have sharply criticized a 2015 National Labor Relations Board ruling broadening the test for determining whether a business is liable as a joint employer for another organization's workplace violations.

Although Subway signed off after receiving Labor Department assurance that the deal would not be the cause of added joint-employment risk, the agreement does not mention the joint-employer issue.

The department, in a statement provided to Bloomberg BNA, said nothing in the pact “increases or decreases the likelihood that Subway could be held as a joint employer in an investigation into FLSA violations by a franchisee conducted by the Wage and Hour Division.”

The Subway agreement touches on two critical interpretative shifts in workplace enforcement: the Labor Department's new rule (RIN:1235-AA11) on overtime and the 2015 NLRB decision in Browning-Ferris.

Under the final overtime rule, issued May 18 and effective Dec. 1, the annual salary threshold for exemption from FLSA overtime regulations is to rise to $47,476 from $23,660.

The Browning-Ferris case is causing a different type of headache for employers. Franchisers may want to assist franchisees, many of whom have employees who would be newly eligible for overtime pay, but are reluctant to provide sophisticated payroll tools out of fear that the NLRB could use the information sharing as evidence of a joint-employer relationship, Haller said.

That is why one particular provision in the Subway agreement is worrisome. The pact states that the parties “agree to explore ways to use technology to support franchisee compliance, such as building alerts into the payroll and scheduling platform that Subway offers as a service to its franchisees.”

Asked to elaborate how Subway and the division plan to explore ways to leverage technology, Weil said it pertains to franchisees using software to flag nonpayment of overtime and other FLSA violations.

But to some franchisers and management lawyers, this is still unsafe territory regarding the NLRA.

“Many franchisors do have software programs that they require their franchisees to utilize, and certain aspects of those software programs have been looked at as evidence of control, especially with related to wage-and-hour- and employment-related aspects of the relationship,” John Skelton, who represents franchisers as a partner at Seyfarth Shaw LLP in Boston, told Bloomberg BNA.

“If their platforms and software that they require includes aspects that do control wage-and-hour-related stuff on the franchisee level, that could be dangerous, because that could from the NLRB perspective say, ‘aha that’s the kind of either exercise of control or reserved right to control that is evidence of a joint-employer relationship,'” Skelton said.

Repeated FLSA Violations

The voluntary agreement expanded on a less-formal partnership that started in 2012, when the agency noticed repeated FLSA violations at Subway franchisees.

From Oct. 1, 2012, to Sept. 30, 2015, the Wage and Hour Division concluded more than 800 compliance actions at Subway franchisees, finding more than $2 million in back wages for more than 6,000 workers, Labor Department figures showed.

The agreement calls for the Wage and Hour Division to create compliance assistance materials for the franchise restaurant industry, developed with Subway input. The company and Labor officials plan to meet quarterly to discuss concluded investigations and regulatory updates.

To build on occasional Wage and Hour Division training at Subway conferences, the division saw a chance to provide deeper compliance outreach at the nation's largest franchiser by number of stores.

“We wanted to go further with the relationship and have greater impact on compliance than we were seeing,” Weil said.

To contact the reporter on this story: Ben Penn in Washington at To contact the editor responsible for this story: Michael Trimarchi at

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