Hot on the heels of disappointing AB-5 news from California, a federal district court in Manhattan delivered a stinging rebuke to the Department of Labor (“DOL”), invalidating the control-based joint employment rule issued by the Department only 6 months ago.

The DOL Rule adopted a control-based test of joint employment for purposes of federal employment law, in particular the Federal Labor Standards Act (“FLSA”). The Rule was strongly cross-current to states legislative actions adopting versions of the ABC joint employment test, e.g., California’s AB-5 legislation, and encouraged franchisors and franchisees to believe that the franchise business model might escape the worst impacts of these state actions. In Biblical terms, joy has turned to weeping.

Almost immediately after the DOL Rule issued, a coalition of Attorneys General from 18 states challenged the Rule’s validity. On September 8th, a federal Judge largely agreed with the AGs in a 62 page opinion in New York v. Scalia, on the issue of vertical employment. Of course, it is the vertical test that’s critical in the franchise industry. The DOL got that test wrong on all fronts, the Court opined. Not only was the process of adoption deficient, but the substance ignored the language of the FLSA by impermissibly narrowing the Act’s joint employment standard.

The DOL has not raised the white flag in response to the Court’s ruling; instead it has signaled defiance: “We stand by the Rule and are weighing all options.” An appeal is apparently not an option, another attempt at rulemaking by the DOL will take time that this Administration may not have, and traversing the Court’s objections would be a tall order given the Judge’s detailed and closely reasoned exegesis of the FLSA, its purposes, history and implementation over its 50+ year history. It particularly rankled the Judge, it seems, that the Rule effectively exempted the franchise model from the joint employment definition.

Where does this leave the franchise industry and the many thousands of people whose employment depends on the success of the model? On the hot seat. While the current DOL is highly unlikely to press for enforcement of the FLSA using the prior joint employment test, a future Administration may do so. States that have adopted an ABC joint employment test, on the other hand, may become emboldened to push state enforcement efforts.

A glimmer of optimism might be found in 7-Eleven’s very recent (September 10th) escape from a misclassification suit in Massachusetts, Patel v. 7-Eleven. Relying on Massachusetts’ Independent Contractor Law (“ICL”), codifying the ABC joint employment test, a group of 7-Eleven franchisees alleged they had been misclassified as independent contractors rather than employees. The crux of the case was the impossibility of harmonizing the legal requirements imposed on franchisors under federal law with the presumption of employment in the Massachusetts ICL law. As the Court reasoned, it was impossible for any franchise to satisfy the first prong of the ABC test, requiring a demonstration that the independent contractor is free from the principal’s control, given that the FTC franchise rule only applies to relationships in which the franchisor exerts a significant degree of control over, or provides significant assistance to the franchisee in its method of operation. Those same characteristics would prevent 7-Eleven and other franchisors from meeting the first prong of the ICL. Every franchise relationship would by definition constitute an employment relationship under the ICL. The ICL thus irretrievably conflicted with federal law. Happily for 7-Eleven, the Court held that federal law must pre-empt application of the Massachusetts ICL.

The 7-Eleven case offers a glimmer of hope to franchisors facing state law enactments of the ABC joint employment test. But the Court’s decision in 7-Eleven would lead to exactly the result feared by the Scalia Court – franchises would be could never be joint employers under an ABC test.

Joint employment standards truly are in chaos, and the future is even less predictable than before. As the saying goes, “watch this space,” but with trepidation.