What to make of the Wage and Hour Division's voluntary compliance agreement with the Subway franchise system

On July 26, the U.S. Department of Labor’s Wage and Hour Division entered into a “Voluntary Agreement” with the franchisor of the Subway brand, known as Doctor’s Associates, Inc., and its affiliates.

The agreement reads like a mutual back-scratching, though not surprisingly, the WHD retained the sharper nails in the drafting. The agreement itself is certainly comprehensible and praiseworthy, and it makes sure to compliment Subway, but what does it truly do?  In essence, it emphasizes that compliance with the Fair Labor Standards Act is a high priority of the franchisor within the entire Subway franchise system.

Does this sound strange?  On one level, it should.  Hands-on involvement by the franchisor in matters pertaining to the wages and hours of the franchisees’ employees is a critical building block in a joint employment analysis. Thus, with the Voluntary Agreement, the WHD has put Subway in a more difficult position when it wants to argue that it is not the joint employer of its franchisees’ employees.

It is the responsibility of every employer to ensure that its employees are paid in accordance with the FLSA and applicable state wage-hour law. Thus, every franchisee in the Subway system already had that responsibility. Moreover, as the Voluntary Agreement recognizes, Subway’s form franchise agreement (like most these days) already informed franchisees that they are fully responsible for compliance with all state and federal laws, including the FLSA, in the operation of their business.

Now, however, with the Voluntary Agreement, the WHD has forced Subway to take back much of that responsibility as follows:

• Subway, with the assistance of the WHD, will explore ways to use technology to support compliance with the wage-hour laws at its franchise restaurants, “such as building alerts into the payroll and scheduling platform.”

• Subway will meet with the WHD every three months to engage in a dialogue about improving franchisee compliance with the wage-hour laws (notably, this agreement has no limit in time). The purpose of the meetings includes the following:

     development of new ideas for promoting franchisee compliance throughout Subway stores in the United States;

     development of opportunities for “corporate” leadership to engage in creative problem-solving that leads to widespread compliance.

• Subway, “when circumstances warrant,” is essentially supposed to “inform” (which may truly mean “warn”) franchisees that if they do not comply, the WHD has the right to investigate and come on site to do so.

• Subway should terminate, limit or discipline franchisees with a history of FLSA violations.

In January, WHD Administrator David Weil issued an interpretation that described the WHD’s position that the concept of joint employment should be construed broadly. According to the WHD, the degree of control exercised over an employee should be a primary focus of the joint employment inquiry.

Notably absent from the Subway agreement is any reference to a joint employment relationship or what, if any, impact the agreement will have on the determination that such a relationship exists.

One thing is certain: The Voluntary Agreement helps plaintiffs’ counsel and other government agencies, such as the National Labor Relations Board, who are looking to advance the joint employment argument, whether against Subway, or in other similar scenarios. Franchisors should take notice themselves, but also give notice to their franchisees to work with experienced consultants or counsel to ensure they are not inviting a liability analysis — one that could be “joint” — under the wage-hour laws.

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