With just a few words, the Department of Labor has withdrawn one of its most controversial actions of the Obama Administration.

In a brief statement on June 7, Secretary of Labor Alexander Acosta announced “the withdrawal of the U.S. Department of Labor’s 2015 and 2016 informal guidance on joint employment and independent contractors.”

The statement is likely to be music to the ears of franchised businesses, restaurant chains, and retailers embroiled in lawsuits over who is, or is not, technically an employee.

In August 2015, a ruling by the National Labor Relations Board abandoned 30 years of precedent by redefining and expanding the concept of “joint employer.” As a result, any company that relies on other businesses for contract labor, or uses a franchise business model for its operations, has much greater risk for labor conditions at those other businesses, even though the original company is a separate entity from those partners. Guidelines released in January 2016 by the Labor Department’s Wage and Hour Division codified the broader definition of what could be considered a joint employer.

Since 1984, the NLRB had recognized companies as independent from the businesses with whom they contract when labor disputes arise, so long as they didn’t share direct and immediate control over terms and conditions of employment. Companies that merely possessed the ability to exercise control without actually doing so were not considered a “joint employer.”

That standard changed with an NLRB ruling against a unit of Browning-Ferris Industries of California. Under its new standard, the NLRB deems companies to be a joint employer if they exercise “indirect control” over terms and conditions of employment and where they merely have the right to exercise that control. The NLRB held that the new standard would apply retroactively.

The ruling, not industry-specific, covers every company that contracts out for services rendered by those who are not the company’s own employees. It means, for example, that the headquarters of a fast food chain could be held liable for the unfair labor practices of an otherwise independent franchisee.

The National Retail Federation was among those welcoming the announcement that the Labor Department that it would withdraw the “burdensome guidance.” That created “seemingly limitless liability in business to business relationships.”

"The announcement from the Labor Department is an important first step in reversing one of the most onerous regulations imposed by the previous administration on businesses,” says Matthew Shay, NRF’s president and CEO.  “Drastically expanding joint employer liability to hold one business responsible for the actions of another independent business, such as a subcontractor or franchisee, did nothing to protect employees and only created uncertainty that led to more growth-chilling litigation.”

“Retailers hope Congress will build on this progress and put the issue to rest once and for all with clear, fair legislation defining joint employers,” he added. 

Chain restaurants were similarly pleased. 

“The Secretary’s action today is a common-sense response to ill-advised and unhelpful policy implemented by the past Administration. Rescinding the joint employment policy will provide chain restaurant owners with more clarity about the Labor Department’s position moving forward., said Rob Green, executive director of the National Council of Chain Restaurants. “We look forward to additional administrative action from the National Labor Relations Board and a legislative response from Congress to fix the broader problems created when the new standard was created by the NLRB which entangles neutral employers in labor disputes and renders companies liable for labor violations by their subcontractor, vendors, and franchisees.”

The International Franchise Association applauded the retreat from “one of the most costly and burdensome regulations impacting the franchise business model.

“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 undo this costly regulation created by the previous administration,” said IFA’s vice president of public affairs Matt Haller. He also urged Congress “to find a true permanent solution.”

“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,” Haller said.

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