Franchise Workers Win Victory Over U.S. Effort to Curb Lawsuits

A federal judge has struck down key portions of a Trump administration rule that made it more difficult for workers to win lawsuits against companies over violations committed by contractors and franchisees.

The rule, which the Labor Department proposed last year and made final in January, raised the bar for employees of a franchise like Burger King or Subway to win a judgment against the parent company if the restaurant violated minimum-wage or overtime laws.

Because the contractors and franchisees that directly employ workers often have limited resources, suing the larger companies is often the best hope for workers seeking to recover wages they are owed.

In a decision on Tuesday in U.S. District Court in Manhattan, Judge Gregory H. Woods largely sided with the more than 15 states that challenged the rule. He said the Labor Department had departed from the statute governing minimum-wage and overtime rules without adequate justification, rendering the rule arbitrary and capricious.

Judge Woods also said the department had failed to “make more than a perfunctory attempt” to consider the costs of the new rule to workers. All told, he wrote, the new approach to liability for parent companies was “flawed in just about every respect.”

A Labor Department spokeswoman said that the decision was disappointing and that the department would review its legal options.

David Weil, who oversaw enforcement of wage and hour laws during the Obama administration, said that he expected the department to appeal the case, but that an appeals court would almost certainly not rule before the presidential election.

The Labor Department “cannot wish away our basic workplace law,” said Mr. Weil, who is now dean of the Heller School for Social Policy and Management at Brandeis University. “The slapdash nature of the department’s rule was vividly demonstrated by Judge Woods’s scathing opinion.”

Under the Obama administration’s approach, a broad set of circumstances could make a parent company a so-called joint employer, meaning that it has liability for violations committed by a contractor or franchisee. Those circumstances include anything from direct control of workers to simply providing facilities and equipment that the workers use.

But the Trump Labor Department required evidence of control to render the parent company liable as a joint employer. Under its rule, a company like Burger King could typically be held liable for violations only if it hired and fired employees of the franchisee, if it supervised them and dictated their schedules, if it set their pay, or if it oversaw their employment records.

Judge Woods said those criteria were “impermissibly narrow,” though he did leave intact a separate portion of the rule that doesn’t typically apply to employment relationships mediated through contractors and franchisees.

The National Labor Relations Board in February authorized a similar rule, which made it harder for employees of contractors and franchisees to win lawsuits against parent companies over violations of other aspects of labor rights, like firing workers who try to unionize.

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