The Effect of the Recent NLRB Ruling on Franchising

National Labor Relations Board Building Sign

The National Labor Relations Board (NLRB) is reshaping fundamental labor laws and employment practices in favor of unions, with significant implications for franchise organizations and many other organizations. How significant is this? Franchise locations are nearing 800,000 in the USA providing 8.5 million Americans with jobs.

In an effort to make it easier for franchisee employees and contract workers to unionize, the NLRB has successfully put into motion legislation that could negatively impact the American Dream as we know it.  

Here’s what you need to know.

The National Labor Relations Board (NLRB) is an independent agency of the United States government charged with conducting elections for labor union representation and with investigating and remedying unfair labor practices.

History of the “Joint Employer” Standard

Prior to 1984, the NLRB considered two companies to be joint employers if they both held the right to influence employment conditions for the same set of workers, even if one company did so indirectly.

However, in 1984, the NLRB narrowed the standard, such that both companies had to execute direct and immediate control beyond routine supervision over workers to qualify as joint employers. In other words, companies were only responsible for employees under their direct control.

The Browning-Ferris Case

A recycling plant (Browning-Ferris Industries of California, Inc. dba BFI Newby Recyclery) used a staffing agency (Leadpoint Business Services) to supply workers. The workers voted to form a union. The union (Teamsters) could negotiate with the staffing agency, but it could not negotiate directly with the recycling plant, unless the plant was deemed joint employers. The union requested that the NLRB review the case and reconsider its definition of joint employer relationships.

On August 27, 2015, the NLRB set a new joint employer standard.

Now, “indirect” or even “reserved” control is potentially enough to establish a joint employment relationship. Any company that reserves the right to influence employment conditions over workers hired by a contractor is a joint employer, even if it never exercises that right or only does so indirectly. In other words, the joint employer standard looks to the control a company could potentially exert over the employees of another company when making the joint employer determination.

Further Considerations for “Joint Employment”

The NLRB emphasized that companies cannot limit their responsibility using contract provisions that state that the two companies are not joint employers, if it is clear that a common-law employment relationship exists in practice.

In addition, the NLRB clarified that it will not limit its inquiry to control over hiring, firing, discipline, and supervision.

The NLRB will consider a putative (presumed) joint employer’s control over the matters that may impact employment practices, such as the number of workers to be supplied, scheduling, seniority, overtime approval, and the assignment of work.

Implications of the Browning-Ferris Decision

The NLRB’s decision vastly expands the types and number of entities that can be held responsible for unfair labor practice violations and who may be held to have collective bargaining obligations regarding employees of a totally separate independent employer. Companies that rely on others to supply workers may have a difficult time avoiding legal responsibility for these workers and should be prepared for increased scrutiny from the NLRB.

In addition, the NLRB’s decision on joint employment may be a precursor to the approach taken by other government agencies, particularly the Wage & Hour Division of the Department of Labor (DOL), the Equal Employment Opportunity Commission (EEOC), and the Occupational Safety & Health Administration (OSHA, which is already aggressively pursuing joint employer liability in their investigations), etc.

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McDonald’s

The NLRB is currently litigating a case involving McDonald’s and its franchisees. As a result of the “Fight for $15” protests (aimed at improving the wages and working conditions of fast food employees), the NLRB has charged that the franchisees and their franchisor acted as joint employers and took retaliatory discipline against employees, including reductions in hours, disharges, and other coercive conduct.

The question to be answered during these proceedings is, “Can McDonald’s USA be held liable for alleged labor violations by its franchisees?”

The McDonald’s case will use the “economic reality test” imposed by the NLRB, which will provide additional specificity for franchise companies.

The NLRB has a two-part test for determining whether two entities share or codetermine the essential terms and conditions of employment:

  1. Is there a common-law employment relationship with the employees in question?
  2. If so, does the putative (presumed) joint employer possess sufficient control over employees’ essential terms and conditions of employment to permit meaningful collective bargaining, even if that control is exercised indirectly (through an intermediary, for example)?

As of January 8, 2016, the McDonald’s trial is pending and adjourned until further notice.

Implications for Franchisors

The full implications of the NLRB’s new joint employer standard will not be known until the NLRB begins to apply it.

Franchisors will continue to face greater uncertainty as the NLRB’s views on the new test of joint employer, and how it applies to franchising, unfold. This uncertainty will linger until there is:

  1. a definitive court ruling overturning the NLRB’s decision,
  2. change in the political composition of the NLRB, or
  3. legislative intervention – which certainly is unlikely before the next federal election.

Thus, it is far too early to predict how the NLRB will address the types of controls typically found in the franchise business model.

Possible Action Steps for Franchisors

This information is not to be used as legal advice. It is for informational purposes only and is simply summaries of research and opinions.

To reduce the likelihood of being deemed a joint employer:

  1. Ensure that language regarding employee specifications for franchisees is suggestive, rather than mandatory.
  2. Avoid or remove any semblance of control over franchisees’ employment practices from your franchise agreements and operations manuals, and instruct field personnel to act accordingly.
  3. Avoid or remove all other controls that are not necessary for protection of the brand and the system.

To protect and reinforce the franchise model as a whole:

  1. Redouble your efforts to engage in best practices in your own employment relations, and encourage franchisees to do likewise.
  2. Educate franchisees that a joint employer finding is as disastrous for them as for franchisors.
  3. Continue to demonstrate publicly how franchising is an unparalleled path to the American dream of entrepreneurship.

The Grandparent Analogy

I think we could all agree, grandparents have it made when it comes to grandchildren.

They get to enjoy spending time with them, spoiling them, guiding them, and giving them advice. Then, they’re sent home to mom and dad! The parents are the ones who have direct responsibility for the child’s actions. Parents love to take responsibility for their kids when they behave well. But, when they don’t, they say it must be because it’s the other parents’ kid! They can’t typically say it’s the grandparents fault. If the child were to commit a crime, the parents are the ones who have to answer for it. Grandparents have a degree of separation that protects them from that liability.

In this NLRB situation; Franchisors are the grandparents, franchisees are the parents, and the kids are franchise employees. What they are trying to do is make the grandparents liable for the child’s actions as well. Franchisors are no longer going to be looked at like the grandparents, they will be seen as another set of parents directly responsible for anything their kids do.

This changes lots of things. This means the franchisors will have to be every bit as involved in the child’s life as the franchisees. They will essentially have two sets of parents, and the original mom and dad will be left wondering what happened to the freedom to parent how they wanted to.

Summary

This grandparent analogy might not be perfect, but we hope it’s helped shed some light on the NLRB rulings and the implications could have on franchising, staffing, contract workers, and many more.

As we mentioned above, there is still much up in the air. But, we’ve already seen signs that OSHA, the DOL, and EEOC are will be following in the NLRB’s footsteps when it comes to this matter. We’ll do our best to keep you informed as changes will occur.

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