Why Franchisors Should be Wary of DOL-Subway Deal

While it was hailed as a “recipe for success,” the U.S. Department of Labor’s new alliance with Subway to improve its franchisees’ wage-and-hour compliance might be a recipe for disaster for other franchisors. For many, it raises fears of a slippery slope leading to them being considered joint employers and liable for the failure of franchisees to comply with labor and employment laws.

This concern is not unwarranted. In January, the DOL issued guidance that made it clear the agency is scrutinizing joint-employer relationships. It said the agency had seen a sharp increase in wage-and-hour abuses among joint employers, which are becoming more common as companies explore non-traditional staffing arrangements. These are situations where workers are employed by two or more employers, either through sharing employees, using contractors, or engaging temporary staffing agencies. All employers in a joint-employer relationship can be held liable for wage-and-hour and other employment law violations, even if they are committed by only one member of the arrangement.

Traditionally, franchisors have not been viewed as joint employers because franchisees retain complete control over hiring and staffing. Franchisors generally have no input on these matters. Under the new alliance, however, the DOL and Subway will regularly meet, discuss labor law compliance, and jointly develop materials to use in training Subway franchisees. Subway has also committed to exploring “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.”

It’s this level of control that Subway may now exert over franchisees that have many in the franchise sector concerned. It could be used, for example, by the DOL itself, other enforcement agencies, the National Labor Relations Board (NLRB), and in civil litigation to prove Subway is now a joint employer and liable for any labor law violations committed by franchisees. This is not without precedent. In a case against McDonald’s, the NLRB has raised the use of franchisor-provided scheduling software to argue the franchisor is a joint employer.

Notably, the agreement between the DOL and Subway does not contain any provisions that would protect Subway from being found to be a joint employer. Given the above, this is particularly worrisome.

While it remains to be seen whether or not its initiative with the DOL leads to Subway being inadvertently declared a joint employer, the risk is there.

For other franchisors, it would be prudent to wait and watch to see how this novel situation plays out. It could lead to better wage-and-hour compliance among Subway’s franchisees, and ensure safe, supportive working environments for employees. However, it could just as easily result in unforeseen liability for Subway.

This is also a trend worth watching. After having secured this arrangement, the DOL may approach other large franchisors with similar deals. Again, Subway will be the test case for whether or not it makes good legal and business sense to enter into such a situation. Discussing this thoroughly with experienced counsel would also be advisable.

Posted in Employment Law.