United States: NLRB Weighs-In On Franchise Joint Employers

In late April, the National Labor Relations Board ("NLRB" or the "Board") General Counsel's office issued an Advice Memorandum ("Advice Memo") (No. 177-1650-0100, available here) addressing whether a franchisor (Freshii Development, LLC) was a joint employer with one of its franchisees (Nutritionality, Inc.).  The General Counsel's office determined that the franchisor was not a joint employer with its franchisee, using both the current Board standard for joint employer analysis and a recently-proposed, even-more-inclusive standard.  This decision has given franchisors hope that the presumption of joint employment between franchisors and franchisees that has been circulating in a number of recent court and Board decisions is finally starting to weaken.  

The Evolving Board Standard

Over the last year, the Board has been slowly indicating that it was interested in broadening the standard that has been used for 30 years to evaluate joint employer status.  The NLRB's current standard for analyzing a joint employment relationship relies on whether the parties "share or codetermine . . . the essential terms and conditions of employment."  This involves a party having a "meaningful" effect over matters including hiring, firing, discipline, supervision, and direction.  Under this current standard, other factors have also been considered, including involvement in scheduling, setting of wages and work hours, and tenure decisions, among others.

Recent advocacy by the NLRB, including a call in May 2014 for amicus briefs on the subject, demonstrated its interest to return to the "traditional"—and broader—joint employer analysis, which involves a "totality of the circumstances" approach.  Joint employer status under this standard would be found where:  (i) the structure of the parties' business relationship gives a franchisor "sufficient influence over the working conditions of the other entity's employees such that meaningful bargaining could not occur in its absence," or (ii) the franchisor exercises direct or indirect control over working conditions and terms of employment for the franchise employees.

While collective bargaining may not have an immediate impact on non-unionized businesses, unfair labor practice charges can be brought against all employers for infringement upon their employees' rights under the National Labor Relations Act (as was the case involving Freshii and Nutritionality).

Freshii Development, LLC

The Advice Memo addressed the specific facts of the relationship between Freshii, a fast-casual restaurant chain franchisor, and Nutritionality, one of its franchisees operating in Chicago, Illinois.  Under the terms of the Freshii franchise agreement, Nutritionality had, among other things, (i) no obligation to follow human resources guidance provided by the franchisor's Operations Manual; (ii) exclusive control over employee hiring, setting of wages and benefits, and employee discharge and discipline; (iii) no obligation to consult with the franchisor on employee work hours; and (iv) sole governance over essential terms and conditions of employment.  In other words, Freshii exerted no control over the employment or human resource aspects of Nutritionality's business.  The NLRB evaluated these facts using both current Board law and the General Counsel's proposed standard for joint employer analysis.  Under both standards, the Advice Memo concluded that Freshii and Nutritionality were not joint employers because "there is no evidence that Nutritionality shares or codetermines with Freshii matters governing the essential terms and conditions of employment of Nutritionality's employees."

Freshii played no role in the employment matters involved in Nutritionality's running of its franchise—including hiring, discipline, applicant screening, scheduling, wages, benefits, or even setting employment policies through a handbook—and the franchise agreement explicitly granted the franchisee exclusive control over these areas of its business.  Accordingly, the NLRB General Counsel determined that under the current standard, Freshii as franchisor was not a joint employer with Nutritionality.  For reasons similar to those under the current standard, the NLRB found that Freshii and Nutritionality were not joint employers using the proposed, "traditional" analysis, either.  It found Freshii has no involvement in the terms and conditions of employment nor any influence over the working conditions of the franchise employees, either directly or indirectly, and thus was not a joint employer.

This Advice Memo was followed weeks later by comments made at a May Senate Appropriations Subcommittee hearing, in which NLRB General Counsel Richard Griffin reiterated that he would continue to advocate for a return to joint employer analysis last used by the Board in the 1980's—one which, allegedly, would be more inclusive in finding franchisors as joint employers of their franchisees' employees.  The Senate Subcommittee challenged the prudence of this seeming reversion, citing potential confusion for franchisors as well as a dearth of economic studies supporting this rule.  In spite of the Board's intention to broaden the standard to cover a larger group of employers, recent Board decisions seem to indicate that the presumption of joint employment is far from certain.  Based on the Freshii decision and last year's decision in Browing-Ferris Industries of California, Inc., it is not clear that a change in standard would be more inclusive.  The decision in Browning-Ferris found that a waste services company and the staffing agency it used to staff one of its facilities were not joint employers.  The NLRB granted the union's request for review after it argued that meaningful bargaining could not take place without the waste services company—one form of the proposed standard.  A ruling has not yet issued from this review.

Best Practices

As the issue continues to gain clarity, in order to better position themselves against a joint-employer finding, franchisors can take additional actions to gain distance from direct management and operational control over franchise employees, including, but not limited to:  (i) avoiding the exercise of control over the hiring, firing, promotions, or demotions of franchisee employees; (ii) avoiding the assertion of control over setting or modifying employment conditions of franchisee employees (including scheduling, meal and rest breaks, timekeeping, etc.); and (iii) avoiding participation in or setting of policies controlling employee training programs.  This is not an exhaustive list, and consulting with counsel before making any changes to your franchise policies is the best option.  That said, taking these and similar steps will better protect franchisors from joint employer liability when unfair labor practice charges or employee lawsuits do arise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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