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Who’s Your Boss? Team Trump Has a Clear New Answer

Michael R. Strain

(Bloomberg Opinion) -- If you’re a typical wage earner, then your employer is obligated to pay you at least the federal minimum wage, along with overtime if you work beyond 40 hours in a given week. But who is your employer? On Sunday, the administration of President Donald Trump brought a common-sense answer to this important and, surprisingly, unresolved question.

Determining who is liable for violations of employment law is more complicated than it may seem. Take a cashier at, say, an independent McDonald’s franchise. Certainly she works for the franchised restaurant. But does she also work for McDonald’s, the national brand? What responsibility does McDonald’s Corp. have for her?

The waters are similarly murky for an employee of a staffing agency or a contractor who is assigned to a business, like a security officer who is assigned to a law firm. If the guard is owed overtime but doesn’t receive it, who should be held accountable? The agency? The law firm? Both?

These issues have grown in importance as companies increasingly contract with outside firms for many services and functions that would once have been taken care of in-house. At large employers, it is now common for building maintenance, security, kitchen, laundry and custodial staff not to work directly for the company they report to each day. Today, it is even common for hotel rooms to be cleaned by employees of temporary staffing agencies. The same goes for the workers who load trucks at retail distribution centers. This remains true as well for activities that have long been outsourced, like payroll and accounting services.

This creates complications for the enforcement of employment law, because what workers actually do on the job — their schedules, the quality standards they are expected to meet, the procedures the need to follow — is often determined by their indirect employer, even though they are direct employees of a staffing agency or a franchise.

How much responsibility do indirect employers have for compliance with employment regulations? The uncertainty around this question has been a burden for businesses, creating compliance costs and duplicate record keeping. It has exposed national brands and businesses that hire contractors to litigation when employment regulations are violated, and in other instances.

Now the Trump administration has adopted a four-factor test to assess whether an indirect employer is a joint employer that would bear legal responsibility for violations of minimum-wage and overtime regulations. Take the example of McDonald’s and an independent franchise. McDonald’s would be deemed a joint employer if it hires or fires employees of the local franchise; supervises and controls employees’ work schedule or other conditions of employment to a substantial degree; determines employees’ pay; and maintains workers’ employment records.

Typically, a company would have to meet some or all of these criteria to be liable for wage and hours violations.

This is a narrower standard for determining joint-employer status than the practice that existed under the administration of President Barack Obama, which expanded the responsibilities of indirect employers in January 2016. The International Franchise Association (the largest organization representing franchises worldwide) argues that the broader criteria previously in place cost U.S. franchisees between $17 and $33 billion per year.

The new rules — which will affect the behavior of workers and employers, and will influence court decisions — are a victory for common sense. They more clearly define the roles and responsibilities of different parties, which will make it easier for them to work together productively and efficiently. Indirect employers will know what steps to take to avoid legal liability and compliance costs and record-keeping costs. National brands will be shielded from litigation over employment issues in local franchises they could not control. Court decisions will become more uniform, which will help businesses. By reducing compliance costs, employers in the low-wage labor market will have more resources to grow their businesses.

Sunday’s Department of Labor guidance is limited to regulations under the Fair Labor Standards Act, a landmark piece of New Deal legislation that determines rules about wages and hours of work and prohibits child labor. It is part of a broader conversation about joint-employer status. The National Labor Relations Board, the government agency responsible for enforcing collective-bargaining laws, is expected to issue a similar rule in the next few weeks, reversing Obama-era policy that made it easier for contractors and workers in franchised businesses to unionize.

These are welcome developments that will, on balance, accrue to the benefit of workers in the low-wage labor market. But it is important to point out that violations of labor law are all too common. A 2017 report by the Economic Policy Institute, a progressive think tank, found that low-wage workers lose billions of dollars per year due to minimum-wage violations alone. Still, the best solution is better enforcement of labor law, not muddying roles and responsibilities in economic relationships.

The Trump administration touts deregulation as one of its major accomplishments. These claims can be overblown. But this guidance is a feather in its cap.

To contact the author of this story: Michael R. Strain at mstrain4@bloomberg.net

To contact the editor responsible for this story: Jonathan Landman at jlandman4@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute. He is the editor of “The U.S. Labor Market: Questions and Challenges for Public Policy.”

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