Last week, the Subway restaurant chain entered into a landmark partnership with the U.S. Department of Labor (DOL) aimed at improving Fair Labor Standards Act (FLSA) compliance among the chain's 27,000 franchisees. The DOL issued a statement that the deal neither "increases or decreases the likelihood that Subway could be held as a joint employer in a [DOL] investigation into FLSA violations by a franchisee," and the agreement itself is silent on this point. Nevertheless, it remains to be seen how the agreement will be viewed by the National Labor Relations Board (NLRB), courts, and other federal and state agencies when applying joint employer concepts under labor and employment laws.

Under the agreement, Subway and the DOL's Wage and Hour Division (WHD) will collaborate to provide compliance assistance and support to franchisees and will work together to improve FLSA awareness and compliance. In particular:

  • The parties will provide compliance assistance and training materials to franchisees, with the goal of developing a "package of easy-to-use compliance assistance materials for the franchise restaurant industry." The agreement envisions input from Subway, as well as other franchise restaurant chains.

  • Subway and the DOL will develop compliance support for franchisees through data-sharing and technology. The parties agreed to explore various ways to use technology to support franchisee compliance, such as building alerts into the payroll and scheduling platform that Subway offers to its franchisees. In addition, the DOL is committed to working with Subway to review publicly available enforcement data, so that Subway can make "informed business decisions," which reflect franchisees' history of FLSA violations.

  • Subway and the DOL committed to regular meetings to share information and evaluate compliance trends. The parties will meet every three months "to engage in a dialogue about improving franchisee compliance."

  • Subway will communicate with its franchisees about their responsibilities to comply with the DOL's investigative process, including the agency's right to investigate and gather wage and hour data, inspect a franchisee's premises, and question workers about their employer's FLSA compliance.

The agreement also binds Subway to require that its franchisees comply with the FLSA and all other applicable laws, and expressly notes that Subway may exercise its judgment to terminate or discipline a franchisee based on a history of FLSA violations.

In short, Subway has agreed to take on a significant role in its franchisees' FLSA compliance efforts. As noted, it is not clear how this will impact a joint employer issue arising under other laws.

Last year, with its controversial decision in Browning-Ferris Industries of California, Inc., the NLRB expanded the scope of joint employer liability under the National Labor Relations Act (NLRA), holding that businesses may be joint employers if they "share or codetermine those matters governing the essential terms and conditions of employment" or have the potential to do so. This new standard has been applied by the NLRB in the franchise context in the well-publicized McDonald's cases. Accordingly, to date, other national restaurant franchisors have declined to partner with the DOL in a deal similar to Subway's over concerns that the NLRB could use such an agreement as evidence of a joint employer relationship under Browning-Ferris.

Given the DOL's new overtime rules, its recent guidance on employees/independent contractors, and the NLRB's focus on joint employer relationships, franchisors should evaluate whether a Subway/DOL-type agreement makes sense for them. Indeed, given the recent increased legal attention on the joint employer issue under many laws and from many courts and agencies, franchisors may wish to take this opportunity to evaluate their relationships with their franchisees and their franchisee agreements, with an eye toward structuring those relationships to minimize potential joint employer liability. Alternatively, where the risk of such liability is significant, franchisors may wish to consider a Subway/DOL type of approach to interacting with franchisees.

Ballard Spahr's Labor and Employment Group routinely assists employers in ensuring compliance with FLSA, NLRA, and other state, federal, and local statutes and regulations.

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