Subway, DOL Compliance Deal a New Template for Franchises?

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By Ben Penn

Aug. 1 — The Subway restaurant chain is partnering with the Labor Department to improve wage-and-hour compliance at its 27,000 franchised stores, creating a potential industry template but raising questions about joint employment.

Under a voluntary agreement announced Aug. 1, the DOL’s Wage and Hour Division will meet regularly with Subway to share enforcement data and explore how franchisees can use scheduling and payroll technology to avoid overtime violations.

The negotiations were guided by a pair of bottom lines: Subway insisted that it mustn't face added risk of Fair Labor Standards Act joint employer liability, while the DOL needed to retain enforcement authority over Subway’s franchisees, WHD Administrator David Weil told Bloomberg BNA.

The agency has already attempted to reach similar terms with other franchisers and hopes the Subway arrangement motivates more companies to step forward, Weil said.

But those other businesses have yet to agree to a deal because the DOL wouldn’t commit to shielding the franchisers from liability under other statutes, such as the National Labor Relations Act, according to Matthew Haller, senior vice president for communications and public affairs at the International Franchise Association.

The IFA 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.

Businesses may be joint employers if they “share or codetermine those matters governing the essential terms and conditions of employment,” the board held in Browning-Ferris Industries of California, Inc., 362 N.L.R.B. No. 186, 204 LRRM 1154 (2015).

NLRB Concerns Stop Other Franchiser From Signing

Senior officials at one national retail food franchiser told Bloomberg BNA that their negotiations with the WHD stalled after Weil declined to assure them that the NLRB wouldn't use wage-and-hour compliance education “as evidence of us being a joint employer with our franchisees.”

Weil “looked at us and in a very politically correct manner, he said, ‘I can't guarantee you that,' ” one company executive said. The officials spoke on condition of anonymity.

“We said we want to go down this path, we would like to talk about encouraging franchisees to be in compliance with wage-and-hour laws, but we won’t go down that path without some sort of assurance, at least from the DOL’s perspective, that we won’t be held liable as a joint employer,” the franchiser's executive said.

“We don't have a comment on this,” NLRB spokeswoman Jessica Kahanek told Bloomberg BNA via e-mail.

Although Subway signed off after receiving DOL assurance that the deal wouldn't be the cause of added joint employment risk, the language itself is silent on the joint employer topic.

However, the department, in a statement provided to Bloomberg BNA, said “nothing in this agreement 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.”

Subway Deal Meshes Overtime Rule, Browning-Ferris

The Subway agreement touches on two of the administration’s most controversial interpretive shifts in workplace enforcement: the DOL’s regulation (RIN:1235-AA11) to expand overtime eligibility and the NLRB’s Browning-Ferrisruling.

Subway’s “opportunity to help their franchisees understand their obligations under the new” overtime “rule was something they were very interested in,” Weil said. The company wanted to allow the WHD “to use the agreement as a way to get our materials out to their franchisees so that they could come into greater compliance with the new rule,” he said.

The regulation doubles the salary threshold below which workers are eligible for overtime to $47,476 per year, effective Dec. 1.

The Browning-Ferris case is causing a different type of headache for some employers. Franchisers may want to assist franchisees, many of whom have employees who will be newly eligible for time-and-a-half pay. But they’ve been reluctant to leverage the more sophisticated wage-and-hour tools at company headquarters out of fear that the NLRB could use the information sharing as evidence of a joint employer relationship under its more expansive standard, the IFA's Haller said.

That's why one particular provision in the Subway agreement is raising red flags. 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.”

Weil Explains Software Provision

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

“This is where of course” Subway is “going to be careful. It's not that that information in the payroll system would come back to Subway corporate,” the administrator said. Instead, Subway could have its franchisees adopt payroll systems that “flag the potential of the violations of the law that the franchisee would need to know; not that that then becomes a conduit back to Subway as a corporate franchisor, because then it's no secret to anyone that they would have concerns about things in the agreement that would lead them towards becoming a joint employer.”

But to some franchisers and management attorneys, 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 control or reserved right to control that is evidence of a joint employer relationship,' ” he said.

That's why it would behoove the DOL and NLRB to provide greater clarity on how such compliance agreements for one law might affect a company's level of control under another statute, the IFA and its members say.

To Weil, such collaboration with other agencies isn't appropriate. “We wouldn’t collaborate or coordinate” with the NLRB “on a partnership like this and we wouldn’t on enforcement because our statutes have entirely separate, different criteria,” he said. “Our enforcement authorities are entirely separate and independent.”

The WHD has a separate, but also broad, interpretation of joint employment liability, which was articulated in an administrator’s interpretation last January.

Subway declined to elaborate on whether it faces joint employment risk as a result of the agreement.

“As a franchisor we want to do all that we can to build a socially responsible brand,” Michele Dinello, Subway's director of corporate communications, said in an e-mail. “We are excited about our continued collaboration with the Department of Labor and are committed to making available a platform for the DOL to provide training and resources to independent franchise owners to ensure they have the tools necessary to comply with wage and hour laws.”

Subway Had History of Violations

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

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

The resulting agreement was signed July 26 and formally announced Aug. 1 in a WHD blog. “It is an example of saying how do we have the biggest impact on compliance given our limited resources,” Weil said in an interview.

“The opportunity for this kind of voluntary agreement really is an important way to get scale on really building greater compliance in an industry like fast food, which remains a very problematic industry in terms of the prevalence of wage-and-hour violations,” he said.

But it wasn't just the number of Subway stores that compelled the WHD to negotiate the deal. The 2012 training partnership didn't stop the division's investigators from uncovering new violations, the agency said.

Between Oct. 1, 2012, and Sept. 30, 2015, the WHD concluded more than 800 compliance actions at Subway franchisees, finding more than $2 million in back wages for more than 6,000 workers, according to DOL figures.

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

The pact now calls for the WHD to create “easy-to-use compliance assistance materials for the franchise restaurant industry,” developed with Subway input. The parties will also meet every three months to discuss concluded investigations and regulatory updates.

Will More Franchisers Follow Suit?

Whether more companies join Subway in reaching compliance agreements for franchisees remains to be seen.

Executives at the national food retail franchiser that declined to agree to the DOL's terms did tell Bloomberg BNA that they remain open to further discussions.

One management-side wage-and-hour attorney said he expects his larger hotel and quick-service food franchiser clients to be amenable to starting negotiations with the WHD.

“I think that most clients are going to say, ‘Yeah, we're very interested,' ” Brett Bartlett, a partner in the wage-and-hour litigation department at Seyfarth Shaw LLP in Atlanta, told Bloomberg BNA. “Will they ultimately” sign an agreement? “I don't know.”

Sure, there's risk, but the potential benefits of such an arrangement might make it worth it, Bartlett said.

By coming to terms, “it becomes less likely that the Wage and Hour Division is going to aggressively pursue a business. More likely than starting an investigation, they would pick up the phone and call the point of contact at the business, and that’s a great thing,” Bartlett said.

“In a straight FLSA case, I would envision if there were private litigation, I would be talking about the wonderful things that we did in partnership with the Wage and Hour Division to ensure we were in compliance with the laws, and that would help us to avoid that third year of exposure under the FLSA and potentially liquidated damages,” he said.

To contact the reporter on this story: Ben Penn in Washington at bpenn@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

For More Information

Text of the voluntary agreement is available at http://src.bna.com/hd5.

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