Labor Department Rolls Back Obama Franchise Rules

Move seen as victory for franchises and contractors

Labor Secretary Alexander Acosta / Getty Images
June 7, 2017

The Department of Labor will roll back an Obama-era policy that attempted to increase regulatory oversight of franchise and contractor businesses.

Labor Secretary Alexander Acosta announced on Wednesday that the department would withdraw an Obama-era guidance that increased scrutiny for subcontractors and franchise businesses in which small businesses operate independently under the umbrella of larger corporations.

"U.S. Secretary of Labor Alexander Acosta today announced the withdrawal of the U.S. Department of Labor’s 2015 and 2016 informal guidance on joint employment and independent contractors," the department said in a Wednesday release.

In 2016 the department, led by current DNC Chair Tom Perez, issued an informal guidance that sought to broaden the definition of "joint employment," in order to hold parent companies liable for potential violations committed by subcontractors or franchisees. While labor law had traditionally held that only employers who directly oversaw the work conditions of employees are liable, the department's guidance wanted policy that reflected "broader economic realities of the working relationship," taking supervision, customer service, and other factors into account.

"The analysis must determine whether, as a matter of economic reality, the employee is economically dependent on the potential joint employer," the guidance said. "The expansive definition of 'employ' as including 'to suffer or permit to work' must be considered when determining joint employment, so as to further the statutes’ remedial purposes."

The guidance was seen as a victory to organized labor, which has long sought to unionize franchises. Existing labor standards meant that grievances or organizing campaigns could only be filed against individual franchisees, rather than the large parent companies. Industry insiders have said that they feared that broadening the scope of joint employment could allow labor organizers to take a top-down approach, targeting parent companies or larger contractors.

The International Franchise Association hailed the decision, saying that it helped to address "uncertainty" among employers.

"While uncertainty surrounding the new joint employer standard has made it harder for America’s 733,000 franchise owners to grow and create new jobs, we are pleased the DOL is taking first steps to undue this costly regulation created by the previous administration," IFA spokesman Matt Haller said in a statement. "Locally owned businesses deserve as much clarity and certainty as possible so they can continue to create jobs and serve their communities, and we are hopeful that this effort led by the DOL will help produce that."

Trey Kovacs, a labor policy expert at the pro-free market Competitive Enterprise Institute, said that the Obama rules "needlessly hamstring worker and employer flexibility." He said that the rules made it less likely for companies to contract out work to smaller businesses and could hamper competition among independent business owners.

"The labor rules at issue amounted to informal regulatory 'dark matter' that made it harder for people who want to be in business for themselves and punished large companies for contracting with smaller ones," he said in a statement. "Today's move by the Labor Department to remove barriers to economic opportunity is welcome news for job creators and workers."

The guidance does not affect actions taken by other federal agencies. National Labor Relations Board (NLRB) General Counsel Richard Griffin held in 2014 that McDonald's could be held liable for labor violations committed by franchisees. In October, the company requested that the top NLRB board, which is currently controlled by Democrats, settle the question of joint employment. The agency has yet to release its final ruling.