DOL Signals Intent to Restore Narrow 'Joint Employer' Standard, Easing Franchise Liability

The U.S. Department of Labor has officially signaled its intent to restore a narrower, business-friendly interpretation of the "joint employer" standard under the Fair Labor Standards Act. The move, outlined in the agency's latest regulatory agenda, marks the beginning of a formal rulemaking process to redefine when multiple companies share legal responsibility for the same group of workers.[1][2]

At the heart of the regulatory shift is a fundamental question of modern labor law: when a worker is hired by a local franchise or a temporary staffing agency, to what extent is the overarching corporate brand or the client company liable for wage and hour violations? The joint employer doctrine exists to answer that exact question, determining whether a worker can hold multiple entities accountable for unpaid overtime or minimum wage breaches.[3][4]

Under the newly proposed framework, the Department of Labor intends to reinstate a "direct and immediate control" test. This means a corporate entity would only be considered a joint employer if it explicitly exercises significant control over the terms and conditions of a worker's employment, rather than merely possessing the theoretical right to do so.[1][2]

Specifically, the agency is expected to rely on a four-factor balancing test. To be deemed a joint employer, a company must actively hire or fire the employee, supervise and control their work schedules, determine their rate and method of payment, and maintain their employment records.[2]

This represents a stark departure from broader interpretations that consider "indirect" or "reserved" control. Under broader standards, a corporate franchisor could be held liable simply because its franchise agreement gives it the right to dictate operational standards, even if corporate management never actually steps in to manage the local staff.[3][4]

The franchise business model is particularly sensitive to these definitions. In a typical fast-food or retail franchise, the corporate headquarters licenses its brand, recipes, and operational software to an independent local owner. The local owner is responsible for hiring the cashiers, setting the schedules, and running the payroll.

Franchisors have long argued that holding them jointly liable for a local owner's wage violations undermines the entire premise of the franchise model. If corporate headquarters faces legal exposure for the actions of thousands of independent operators, they argue, they would be forced to exert massive, centralized control over every local storefront, effectively turning independent small business owners into middle managers.[4]

Staffing agencies and their client companies face a similar dynamic. When a logistics company hires a temp agency to provide warehouse workers, the logistics company dictates the overarching tasks and safety standards, but the temp agency handles the actual employment contracts, benefits, and payroll.

Under a narrow joint employer standard, the logistics company is largely insulated from liability if the temp agency fails to pay proper overtime, provided the logistics company did not directly manage the workers' pay rates or HR records. Industry advocates argue this clarity is essential for the flexible staffing sector to function efficiently.[1]

Conversely, labor advocates and worker rights organizations view the narrow standard as a corporate shield that encourages the outsourcing of legal liability. They argue that corporate franchisors and large client companies dictate the economic realities of the workplace through strict vendor agreements and operational software, effectively controlling the workers while dodging the legal responsibilities of an employer.[3]

When a local franchisee goes bankrupt or a fly-by-night staffing subcontractor disappears without paying its workers, a narrow joint employer standard often leaves those workers with no legal recourse to recover their stolen wages from the deeper pockets of the corporate brand that ultimately profited from their labor.[4]

The definition of a joint employer has been subject to intense regulatory whiplash over the past decade, swinging wildly depending on the administration in power. The Obama administration issued guidance favoring a broad interpretation, focusing on the "economic realities" of the relationship and indirect control.[3]

In 2020, the Trump administration finalized a rule that codified the narrow, four-factor "direct control" test, providing a major victory for business groups. However, a federal judge subsequently struck down portions of that rule, and the Biden administration officially rescinded it, attempting to restore a broader standard that considered indirect control.[1][3]

Now, in 2026, the Department of Labor is moving to resurrect the narrow 2020 framework. The agency argues that the direct control test provides much-needed clarity and predictability for businesses, reducing frivolous litigation and allowing the franchise and staffing industries to operate with legal certainty.[2][4]

It is crucial to distinguish the Department of Labor's standard under the Fair Labor Standards Act from the National Labor Relations Board's (NLRB) joint employer standard. While the DOL rule governs wage and hour liability, the NLRB rule governs union organizing and collective bargaining obligations. Though the two agencies often move in parallel ideological directions, they operate under different statutes.[3]

The DOL's signaling is just the first step in a lengthy administrative process. The agency must now publish a formal Notice of Proposed Rulemaking, open the floor for public comment, and eventually issue a final rule. Given the history of the joint employer doctrine, the final regulation is almost certain to face immediate legal challenges from labor advocates and state attorneys general.[1][2]