What is a "Joint Employer?" The U.S. Department of Labor Clarifies

Being designated as a joint employer can have far-reaching ramifications per the FLSA.

If you are the owner of a business or franchise that:

  • has multiple locations
  • utilizes contract labor
  • shares employees with another related employer

This matters to you, namely, multiple employers can be liable for one employee under the Fair Labor Standards Act (FLSA). The Department of Labor will use this new interpretation to determine whether violations of the FLSA have occurred and whether legal actions should be commenced.

The interpretation highlights a concept that has been the law for quite some time, but was never emphasized or utilized as much as it is by the current Department of Labor.  Namely, that multiple employers can be liable to one employee under the FLSA.

That was not a misprint. Under the FLSA an employee can have more than one employer; the concept is settled law. The scope of the joint employment concept is the subject of the interpretation, which notes that “the concepts of employment and joint employment under the FLSA … is notably broader than the common law concepts of employment and joint employment, which look to the amount of control that an employer exercises over an employee.”

In determining whether an employee has more than one employer, the interpretation provides that the Department of Labor will look to see if the employment relationship fits into one or two employment relationships – Horizontal Joint Employment and/or Vertical Joint Employment.  In a horizontal joint employment situation, the relationship between the two employers is relevant; whereas, in a vertical joint employment situation the economic realities of the relationships between the employee and the employers, and how dependent the employee is on each employer, is analyzed.

Horizontal Joint Employment

Horizontal joint employment exists when two (or more) employers each separately employ an employee and are sufficiently associated with or related to each other with respect to the employee.  Examples of horizontal joint employment may include “separate restaurants that share economic ties and have the same managers controlling both restaurants, or home health care providers that share staff and have common management.”

Factors that are relevant in determining whether there is horizontal joint employment are:

  • Who owns the joint employers (i.e., is there common ownership);
  • Do the potential joint employers have any overlapping management;
  • Do the potential joint employers share control over operations;
  • Are the potential joint employers’ operations inter-mingled
  • Do the potential joint employers treat the employees as a pool of employees;
  • Do the potential joint employers share clients or customers; and
  • Are there any agreements between the joint employers

The interpretation’s examples of horizontal joint employment are focused on the restaurant industry.  For instance, if a waitress or cook works at two different restaurant locations, with both restaurants being owned by the same company, the waitress’ or cook’s time likely needs to be aggregated for purposes of overtime.  For instance, if the cook worked 25 hours at restaurant 1 and 20 hours at restaurant 2, the effect of horizontal joint employment would be the aggregation of these hours and the payment of 5 hours of overtime to the cook.

Vertical Joint Employment

Vertical joint employment exists when an employee of one employer is economically dependent on another employer.  An example might be a construction worker that works for a subcontractor, also is jointly employed by the general contractor, or a hotel that contracts for housekeeping services.

According to the interpretation, the threshold question is whether the intermediary employer (who may simply be an individual responsible for providing labor) is actually an employee of the potential joint employer.  In that case, all employees of the intermediary employer are employees of the potential joint employer.

If the intermediary employer is not an employee of the potential joint employer, then an analysis of the economic realities of the employee and potential joint employer is performed.  The economic realities are analyzed primarily via seven factors:

  • Does the potential joint employer direct, control or supervise the work performed beyond a reasonable degree of contract performance oversight;
  • Does the potential joint employer control employment conditions, e.g., can it hire, fire, discipline the employee or control the employee’s pay;
  • Does the employee have a indefinite, permanent or full-time relationship with the potential joint employer;
  • Is the work performed repetitive, unskilled or require little training;
  • Is the employee’s work an integral part of the potential joint employer;
  • Is the employee’s work performed on the potential joint employer’s premises;
  • Does the potential joint employer perform administrative functions for the employee, e.g., payroll, insurance, providing safety equipment, housing or transportation.

The interpretation provides examples of vertical joint employer in the construction and farm labor industries.


Employers can expect that the Department of Labor will continue to expand its enforcement reach over at least the coming year.  This latest interpretation regarding joint employer follows the National Labor Relations Board’s decision regarding joint employer last fall.  Whether it continues beyond January of 2017, depends upon what happens in the Presidential election this November.  Until we know for sure, however, employers need to take note of this new interpretation and self-audit their operations.

For employers with common ownership that operate multiple locations (including franchisees), if you share employees between those locations, you are likely a horizontal joint employer under this interpretation.  As a result, you must aggregate the hours that an employee works among all of your locations for overtime purposes.

For employers that utilize staffing agencies, labor providers or other intermediary employers, you are possibly a vertical joint employer.  As a result, you need to review and analyze your relationship with the staffing agency, labor provider and the employees to ensure that you are not a joint employer, who is jointly and severally responsible for minimum wage and overtime liabilities.

Also, there is something that bears monitoring beyond horizontal and vertical joint employment.  Several times in the interpretation, the Department of Labor references the “suffer or permit work” standard that is set forth in the FLSA (and child labor laws) to “prevent employers from using ‘middlemen’ to evade the laws’ requirements.”  The repeated reference to this phrase might be used in the future to justify further expansion of joint employer or other wage and hour provisions.

Franchisors who might have been expecting clarity from this interpretation did not get it, as the interpretation does not specifically address franchising.  Franchisors and franchisees must continue to monitor the actions of the Department of Labor in its application of joint employer related to the FLSA, NLRA, Title VII and OSHA.

For more information, feel free to contact James B. Shrimp via email jshrimp@highswartz.com

The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.

Understanding the Franchise Disclosure Document

Getting to know the types of franchise disclosures and some of the red flags can be very helpful to any prospective franchisee.

If you have ever looked into acquiring a franchise, you are probably familiar with the term Franchise Disclosure Document (“FDD”), which is a newer term for and for Uniform Franchise Offering Circular (“UFOC”). The FDD has replaced the UFOC in name, but the disclosures in the document have remained largely the same.

The Franchise Disclosure Document has 23 listed “Items” and numerous exhibits, all required by federal law. Roughly half of the Items are simply an analysis of the franchise agreement, which is an attachment to the FDD.

What's the difference between a Franchise Disclosure Document and a Franchise Agreement?

While the analysis may be helpful, the franchise agreement is binding (an obligation that cannot be broken) and the FDD is not. Understanding the franchise agreement is a topic for another day.  The remaining Items and the information they convey can add critical insight into the health and strength of the franchisor, whether it is growing or shrinking and whether it is a good or not so good investment.

The FDD is broken down in items, that we'll go into detail below.

Item 1 – in the first item of the FDD, you find out about the type of business you are buying, how long the franchisor has been selling franchises, what kinds of competition exist and other relevant facts. Item 1 sets the framework for your basic understanding of the franchise opportunity being offered.

Item 2 – this item describes the business experience of the principal officers of the franchisor. A franchisor owns the rights and trademarks and has the power to grant a license to a third party to use the marks of the franchise. The best franchise companies have experienced leadership with Individuals who understand franchising, not just the business opportunity being offered.

Operating a restaurant and, for example, selling restaurants and making sure the individuals buying those restaurants are successful, are two vastly different businesses requiring different business skills. Look for franchisors that are knowledgeable about their industry but also knowledgeable about franchising and running a successful franchisor.

Item 3 - identifies litigation in which the franchisor is a party. If this Item has numerous disclosures of lawsuits between the franchisor and individual franchisees, stop, read no further, keep your money in your pocket and look for another franchise opportunity. Regardless of the reasons for the litigation, you don’t want to be involved with a litigious franchisor and multiple lawsuits are both a distraction and a financial drain.  There are other opportunities.

Item 4 - is bankruptcy.  If the Item doesn’t state that there is no information that needs to be disclosed, then you have another red flag.  But in this case, check the financial disclosures the franchisor makes as part of Item 21 and the Exhibits to the FDD to determine if it is financially sound. If it is not financially sound and there is a history of bankruptcy, that’s probably not a winning combination. In fact, with or without a history of bankruptcy, if the franchisor is not financially sound, it is probably best not to invest your money in that franchise system.

Items, 5, 6 and 7 - are all financial disclosures. Review these carefully with your financial advisor. Prepare a pro forma (financial statement that calculates projections) and determine what your annual costs will be and the revenue you need to cover costs, pay any debt service you may have and bring home enough to live on. Your financial analysis is a critical part of determining whether this is the right business opportunity for you.

Items 8 through 17 - contain information that can also be found in the franchise agreement. The franchise agreement is what controls, so here is where experienced legal counsel can advise you if the franchise agreement is fair to the franchisee, more standard in the industry (which typically heavily favors the franchisor) or so severe as to be unfair to the franchisee and even a bar to pursue the franchise opportunity. Some franchisors are so intent on protecting themselves they do so to the extreme detriment of the franchisee.

Item 18 - identifies public figures associated with the franchise.

Item 19 - contains financial information which should be reviewed carefully as discussed above.

Item 20 - contains all kinds of helpful information on both franchised outlets and company owned outlets. Is the franchise system growing? Is the franchisor selling new units but then they fail to open in a reasonable timeframe? Are existing franchisees selling and getting out of the system? Are units simply closing and not being replaced? Obviously, these are important questions and there answers can paint a picture as to whether the franchised system is growing, declining or stagnant.

Item 21 - - contains financial information which should be reviewed carefully as discussed above.

Item 22 - lists the contracts attached as exhibits to the FDD.

Item 23 - is simply a receipt signed by the prospective franchisee acknowledging that she/he received the FDD and the date of receipt.

Prospective franchisees can get a good deal of information from the FDD and franchise agreement in determining whether a particular franchise opportunity is the right one for them. A good final check is to call some successful franchisees and some ex-franchisees that may have failed (or left the system for one reason or another). Doing your due diligence can mean the difference between future success or failure.

If you have questions about franchises or the franchise disclosure document, please contact Joel D. Rosen at 610-275-0700 or jrosen@highswartz.com. Our Franchise Law attorneys provide comprehensive legal services to assist in all of these matters.

The information above is general: we recommend that you consult an attorney regarding your specific circumstances. The content of this information is not meant to be considered as legal advice or a substitute for legal representation.

Franchisee’s Struggle: Creating a Viable Business When Someone Else Calls the Shots on Your Social Media Presence

Social media has changed the way we see the world. From its modest beginnings as a way to connect people, social media has grown into an ever present force that cannot be ignored.  We get the news (fake and otherwise), learn about new products,  and keep in touch through social media.  I’d imagine you’d be hard pressed to find someone without a profile on at least one form of social media.  Business are learning how to handle the nuances of social media on a daily basis.

Unlike many businesses, however, franchises face additional and unique obstacles in navigating the already challenging field of social media marketing.  Specifically, when you purchase a franchise, you are buying rights to a business that already has a unique brand.  To that end, franchisors have an understandable interest in maintaining control over what messages you can and cannot transmit to the public at large.

Social media’s ability to disperse negative news with unparalleled speed is well documented.  What might in the past have been a minor PR snafu, easily swept under the rug, may become a viral sensation that brings unwanted attention.   Accordingly, franchisors are reluctant to hand franchisees free rein over social media if that would leave the brand open to attack from careless keystrokes of a franchisee’s employees.

That being said, a franchisee also has an important interest in its own social media presence.  The ability to interact with its local market is a vital component to gaining a strong and engaged customer base.  So social media cannot be ignored when trying to grow a successful and enduring business.

Unfortunately, the franchisor’s and franchisee’s competing interests in the area of social media may limit the franchisee’s ability to use this powerful tool as he/she would like.  Fortunately, before agreeing to franchise a business there is an all important document that will provide you with the information on this topic (along with many other vital topics) that will allow you to make an informed decision prior to setting up shop.  Specifically, a good franchise agreement will contain information on who will be controlling social media sites, if the franchisee can even open accounts for their particular franchise, what policies will control any social media account that is opened, use of trademark information, how to deal with the inevitable dissatisfied customer, and much more. Understanding what the implications of this section will be as to the practical realities of running your business is crucial.

Social media may not be the section of the franchise agreement that concerns you the most, but it certainly cannot be overlooked.  To that end, as you plan to embark on exciting business venture, the importance of consulting with an skilled franchise attorney cannot be overstated.  Having someone to guide you through the process and make sure that you are paying attention to and aware of the potential issues in running your business will help to set you up for long-term success.

If you have any questions about Franchise Agreements, please contact us at 610-275-0700 or main@highswartz.com. Our franchise, business and commercial law practice group at High Swartz LLP in Norristown and Doylestown, Pennsylvania, provides companies throughout the area with creative solutions based on extensive experience and legal knowledge and familiarity with the courts and the business environments of The Greater Philadelphia and Southeastern Pennsylvania region. Attorneys in our business and commercial law group work closely with members of our other practice groups to provide our business clients with comprehensive, efficient legal solutions.

The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.

Franchisees – Things to Watch Out for in 2018

Increased ICE Enforcement

As many of you have probably read about already, on January 10, 2018, Immigration and Customs Enforcement (“ICE”) performed raids at over 100 7-Eleven convenience stores checking on the immigration status of those stores’ employees.  After the raids, Acting ICE Director Thomas Homan cautioned employers that “today’s actions send a strong message to U.S. businesses that hire and employ an illegal work force - ICE will enforce the law, and if you are found to be breaking the law, you will be held accountable.” He continued - “businesses that hire illegal workers are a pull factor for illegal immigration and we are working hard to remove this magnet. ICE will continue its efforts to protect jobs for American workers by eliminating unfair competitive advantages for companies that exploit illegal immigration.”

If you are a franchisee that relies on minimum wage labor, make sure you obtain proof of legal immigration status and have a copy of the I-9 in all employees’ files.  Importantly, a violation of Federal regulation/statute is a default pursuant to most franchise agreements.  Therefore, not only are you as the franchisee going to be dealing with fines and legal action with respect to your employment of undocumented workers, you may also be dealing with the loss of your business.

In short, any savings you might be realizing by hiring undocumented workers is not worth the risk, especially in this environment.

Browning-Ferris Overruled by NLRB - Franchisors Will Reassert Control Over Branding

In late December 2017, the National Labor Relations Board (“NLRB”) overruled the Browning-Ferris decision of two years ago regarding joint employer.  You may remember that the Browning-Ferris decision caused franchisors concern, because over-asserting control over the brand, in relation to employment standards, policy standards, etc… might lead to liability on the franchisor for the acts of the franchisee. Thus, franchisors seemingly had to choose between tight brand control, with potential liability for the acts of the franchisee, or loose brand control, but no risk of liability for the acts of the franchisee.

In December’s Hy-Brand ruling, the NLRB restored the traditional joint employer standard, requiring proof that the alleged joint employer actually “exercised joint control over essential employment terms (rather than merely having ‘reserved’ the right to exercise control) and that “the control must be ‘direct and immediate’ (rather than indirect), and joint-employer status will not result from control that is ‘limited and routine.’”

As a result, franchisees will likely see franchisors reasserting control over the brand – meaning more inspections, more policies and more training.  In addition, for new franchisees you will also likely see more control of the brand/business set forth in the franchise agreement.

If you have questions about franchise law, please contact James B. Shrimp at (610) 275-0700 or jshrimp@highswartz.com

Our attorneys in Bucks County and Montgomery County are here to assist you.

The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.

Reading between the lines: What is in a Franchise Agreement?

July 2, 2015

By Joel D. Rosen, Esquire

Deciding what kind of business opportunity you want to embark on can be challenging. There are countless industry segments and businesses that make your initial decisions daunting. If you are torn between a franchise or an independent business, read this article for some advice To Be a Franchisee or Not to Be; That is the Question.

What is in a Franchise Agreement?
What is in a Franchise Agreement?

If after considering your options you determine that franchising is the way to go, then there are some things you want to know about the key document in the franchise relationship, the franchise agreement. The importance of the franchise agreement should not be undervalued. There is a lot that can be gleaned from its terms.  You can tell a great deal about the mindset of the franchisor by the way in which the franchise agreement is structured.  Is it straightforward and reasonable or is it long, tedious, and onerous to the franchisee?

Though franchise agreements will vary depending on the type of business being offered, there are some basic items that should be included.  The license fee is the amount you will need to pay initially in order to use the franchisor’s brand. There will also be terms related to royalty payments that dictate what percentage of your profits you will have to pay to the franchisor and how often. The agreement may also establish your territory to ensure that you don’t compete with other franchisees from the same system (of course, some systems do bot utilize assigned territories).

Advertising terms explain how much you, as the franchisee, will need to contribute to local and/or national advertising and explain how the franchisor will manage advertising, generally. There will also be terms that outline franchisee and franchisor performance obligations, non-compete provisions, choice of law and jurisdiction, as well as defaults and penalties for breach of the agreement. Because many of these terms will have a direct impact on the daily operations of your franchise, it is vital that you read them carefully and understand what they truly mean.

Some franchisors use the franchise agreement more as a weapon than as a tool. The franchise agreement can be fair to both parties and a vehicle to allow franchisee growth. As you read through the franchise agreement consider if you want to partner with a franchisor that starts with an agreement that indicates its distrust of its partners through the terms of its agreement?

At the end of the day it is vital to remember that the franchise agreement is the beginning in what will hopefully be a long and profitable partnership.  As such, this document is the first opportunity for you to get an idea of what this relationship is going to look like. If the franchisor doesn’t see you as a partner or as a valued customer from the initial agreement, then why sign up? There are plenty of options out there for an enterpreneur, and finding the one that fits is absolutely the crucial first step.


For more information, visit our Franchise Law page or contact Joel D. Rosen at 610-275-0700 or by email at jrosen@highswartz.com.