For decades, companies – especially in restaurant and retail industries – used franchises as a means to expand more rapidly than through more traditional company owned and operated outlets. While franchising one’s business results in a measure of lost control within specific outlets, a company nevertheless reaps substantial economic benefit while minimizing growth and certain other risks. One such reduction in risk traditionally has been shifting responsibility and liability for labor and employment issues to the franchise owner (franchisee). But over the past year, this paradigm has begun to shift dramatically. Due to recent decisions from the National Labor Relations Board, the fundamental definition of an “employer” has begun to change. Specifically, the Board and its Office of General Counsel have pursued and advocated for a more expansive definition of being a ‘joint employer.’ In so doing, the NLRB has broadened the ability for franchise workers to exercise their rights against not only their franchise owner, but also the franchisor, e.g. McDonald’s, 7-Eleven, and Ace Hardware, and be considered in an employment relationship with the franchisor as well as the franchisee. These court decisions, if upheld and followed, could upend the franchise business model such that franchisors may now face increased exposure for employment claims, further obligations to provide labor protection to a wider universe of individuals, and the need to shift any resulting costs to consumers.
What does it mean to be a Joint Employer?
Generally, joint employers exist where two separate legal entities share the ability to control or codetermine essential terms and conditions of employment, such as hiring, supervising, training, directing, disciplining, and firing employees. See, e.g., N.L.R.B. v. Browning-Ferris Indus. of Pennsylvania, Inc., 691 F.2d 1117, 1124 (3d Cir. 1982). Most recently, the U.S. Court of Appeals for the Fourth Circuit outlined nine different factors for courts to use in evaluating whether an individual is jointly employed by different entities, including, among others, day to day supervision, possession and responsibility of employment records, whether the individual’s duties are akin to a “regular” employee’s duties, and which entity provides training to the individual. See Butler v. Drive Auto Indus. of Am., Inc., 793 F.3d 404, 414 (4h Cir. 2015). Where a joint employer relationship exists, both entities must abide by and follow the applicable labor and employment laws with respect to the employees at issue.
Traditionally, in applying the joint employer standard in the franchise context, the NLRB considered the more unique and contractual nature of the franchise relationship (as opposed to the standard relationship between employers and employees and independent contractors). The Board has recognized that the franchise model is in part grounded on the franchisor’s ability to protect its brand and provide for uniformity throughout its locations, while in turn allowing a franchisee owner to generally run the day to day operations of individual locations within this paradigm. As a result, courts have historically been reluctant to find a joint employer relationship in the franchise context. Two recent decisions by the NLRB and its General Counsel could change that paradigm.
Extending Franchisee Employee Rights over Unfair Labor and Discriminatory Employment Practices to Franchisors
In the summer of 2014, the NLRB began to advocate for a more expansive approach toward the joint employer standard. This began with the NLRB’s Office of General Counsel’s determination that McDonald’s controls its franchises at least to such an extent that it qualified as a joint employer for franchisee employees. See McDonald’s USA, LLC, a joint employer, et al. and Fast Food Workers Cmte. and Service Employees Int’l Union, CTW, CLC, et al., Cases 02—CA—093893, et al., 04—CA—125567, et al., 13—CA—106490, et al., 20—CA—132103, et al., 25—CA—114819, et al., and 31—CA—127447, et al. These decisions arose from approximately 180 cases originally filed in 2012, against the corporate McDonald’s entity. The General Counsel ultimately issued unfair labor practice complaints in just under 50 cases jointly against McDonald’s and its franchisees.
The General Counsel’s investigation concluded that a joint employment relationship existed among McDonald’s and its franchisees. McDonald’s “engage[d] in sufficient control over its franchisees’ operations, beyond protection of the brand, to make it a putative joint employer with its franchisees, sharing liability for [labor and employment] violations.” The cases against McDonald’s included specific claims that McDonald’s exercised substantial control over its franchisees’ employment practices, through monitoring the labor procedures of its franchise owners, mandating franchise employees to wear franchisor uniforms, providing or conducting uniform employee training, setting widespread consistent pricing, and directing what equipment a franchise owner could utilize; despite the fact that franchisors have traditionally exerted these types of control. The General Counsel also noted that McDonald’s engaged in a nationwide, unified response to the franchisee employee efforts at increasing wages.
On August 14, 2015, the NLRB denied McDonald’s’ appeal from the Administrative Law Judge’s denial of its motion for a bill of particulars. McDonald’s argued that the General Counsel’s failed to plead sufficient facts in support of joint employer liability. In ruling against McDonald’s, the NLRB found that the General Counsel’s complaint “sufficient to put McDonald’s on notice that the General Counsel is alleging joint employer status based on McDonald’s control over the labor relations policies of its franchisees.” McDonald’s USA, LLC, a joint employer, et al, 362 NLRB No. 168 (2015).
Expanding Bargaining Rights for Franchisee Employees to Franchisors
In August 2015, on the heels of the NLRB General Counsel’s decision to pursue cases brought by franchisee employees against the corporate McDonald’s franchisor, the NLRB panel adopted a more expansive joint employer definition. See Browning-Ferris Indus. of Calf., Inc., d/b/a BFI Newby Island Recyclery, and FPR-II, LLC, d/b/a Leadpoint Business Servs., and Sanitary Truck Drivers and Helpers Local 350, Int’l Bhd. of Teamsters, Petitioner, Case 32—RC—109684. Specifically, the NLRB concluded that a temporary staffing agency and the company where it placed certain individuals for employment were joint employers because they “shar[ed] and codetermine[ed] the terms and conditions of employment.” The NLRB thus required both companies to recognize the collective bargaining rights of the placed employees in the context of a vote for union recognition. While the facts of the case directly concerned temporary workers, its holding effectively granted new bargaining powers to subcontractors and franchisee workers because it generally recognized an expanded joint employer standard. As a result, it further supported the General Counsel’s prior McDonald’s decision on the joint employer standard.
The NLRB concluded that the joint employer definition, based on the Third Circuit’s Browning-Ferris decision from 1982, had been improperly narrowed over the ensuing three decades. It was no longer properly aligned with the core purposes of the National Labor Relations Act, in part due to the ensuing growth of contingent employment relationships. Thus, the NLRB reaffirmed the original standard that two or more employers are joint employers of the same employee “if they share or codetermine those matters governing the essential terms and conditions of employment.” If there is a common law employment relationship between the putative employer and employee, the inquiry will lie on “whether the putative joint employer possesses sufficient control over employees’ essential terms and conditions of employment to permit meaningful collective bargaining.” The NLRB affirmatively rejected the limiting requirements that arose since the 1982 Browning-Ferris decision. For example, the NLRB concluded that a company could still be considered a joint employer even if it did not actually exercise its authority to control employees’ terms and conditions of employment. And the NLRB also concluded that even when such a company did exercise control, it need not be “directly and immediately.”
The NLRB also noted that it would adhere to its traditionally ‘inclusive’ approach in determining what are the essential terms and conditions of employment. While the NLRB had previously indicated that the joint employer standard references hiring, firing, discipline, supervision, and direction of employees, the Board made clear in its decision that it never intended for these to be an exhaustive list of bargaining subjects. As a result, the NLRB declared that it would pursue a broad approach and consider factors including, but not limited to, wages, hours, number of workers to be supplied, scheduling, seniority, overtime, assignment work, and determination of the manner and method of work performance.
Ultimately, in applying the restated joint employer standard to the facts before it in Browning-Ferris Industries of California, the NLRB held that the putative corporate employer qualified as a joint employer because it shared or codetermined with the other company the essential terms and conditions of employment, its right to control was “indisputable,” and both directly and indirectly exercised control.
Potential Judicial Application of Joint Employer Standard
The federal courts (including those in Massachusetts and New Hampshire) have not yet analyzed these recent NLRB decisions. But it is not certain that they will necessarily accept the NLRB’s more generous interpretation of the joint employer standard. As the federal court in the Southern District of New York noted in July 2014, a number of its sister courts, have “generally concluded that franchisors are not employers within the meaning of the [Fair Labor Standards Act].” Cordova v. SCCF, Inc., 2014 WL 3512838 (S.D.N.Y. 2014) (citing cases in California, New York, and Mississippi) (emphasis added). In those actions, the courts concluded that the plaintiff-employees had not established joint employment with the franchisor because the franchisor did not exert control over critical day-to-day functions, such as hiring, firing, and work schedules, at the franchise outlets.
Two recent cases out of California also illustrate a potential reluctance on the part of the courts to apply an expansive joint employer standard to franchisors. In Patterson v. Domino’s Pizza, LLC, 333 P.3d 723 (2014), the California Supreme Court concluded that the corporate Domino’s entity was not liable for a sexual harassment claim by one of its franchisees’ employees. While the court acknowledged that Domino’s set “comprehensive and meticulous standards” to provide for uniformity throughout its franchises, it did not “assume the right of general control over the relevant day-to-day operations at” these locations. Specifically, Domino’s did not have the authority to hire, fire, or train any of the franchisee’s employees, including the alleged perpetrator and victim of the harassment. Relying on this analysis, the federal court in Vann, an Individual, o/b/o Himself & All others Similarly Situate v. Massage Envy Franchising LLC, 2015 WL 74139 (S.D. Cal. Jan. 6, 2015) also found no joint employment relationship and thus no liability for a massage franchisor on claims of violating minimum wage laws. The court noted the lack of control or uniformity among franchisees concerning employee wages, hiring, firing, and work schedules. Finally, the court found that the franchisor’s policies on attire, services offered, and products used, were insufficient to establish a joint employer relationship because these simply reinforced brand uniformity, one of the underlying principles of a standard franchise business model.
The first opportunity for a federal court to comment on these matters will likely be in Betts, et al. v. McDonald’s Corp., et al., a racial and sexual harassment action filed in January 2015, pending in the federal court for the Western District of Virginia. Franchisee employees of McDonald’s named the corporate franchisor a defendant arguing that it operates a “unified business system” through its various franchisees. If successful, it may invite more employment civil rights cases against corporate franchisors in the restaurant and retail industries under Title VII, the Americans with Disabilities Act, and the Age Discrimination in Employment Act. As of the date of this article, this action remains pending.
Ramifications and Practical Considerations
The decisions by the NLRB and its General Counsel have caused a substantial amount of uncertainty in what had generally been a well-understood area of labor and employment relations in the franchise context. The effects of these decisions, presuming they are upheld, may be felt for years by franchisors, franchisees, and individual workers.
Of the three affected groups, franchisors are in the most precarious position. They may now face the need to re-evaluate their scope of risk and responsibility for the employees at each individual franchise. A franchisor may not be equipped to handle an exponential increase in the scale of human resources; for example, McDonald’s has over 3,000 franchise owners who employ hundreds of thousands of workers. Franchisors, thus, should carefully review and consider all aspects of their franchise agreements, especially those sections concerning any right to control labor and employment relations. Precise drafting may assist in avoiding future exposure under an expanded joint employer standard.
Franchisees, while caught in the middle between their workers and their franchisors, could reap some benefit from the expanded joint employer standard. Franchisors may absorb some or most of the responsibilities, such as collective bargaining negotiations and training of proper employment practices, that franchisees had traditionally shouldered on their own. However, franchisees may also be dragged into increasingly contentious matters should workers initiate more actions or disputes and name both the franchisor and franchisee as opposing parties. While in the past, franchisees and their workers negotiated amicably, franchisors may not have as much flexibility in resolving labor and employment relations matters affecting tens or hundreds of thousands of potential employees across a wide geographic area. As a consequence, plaintiff-employees might as a matter of course add the franchisees as defendants in legal actions aimed primarily at the franchisors.
Finally, employees are likely to benefit the most from this legal liability expansion. Labor and employee advocates have already claimed that the NLRB’s decisions will foreclose one of the means that franchisors have used to limit wages and related employee payments such as Social Security and Medicare taxes. At a minimum, expanding the joint employer standard may provide employees with greater power to bargain and extract concessions from large, national franchisors. Employees interested in pursuing such matters, however, must carefully review the franchise agreement between their immediate and putative employers. They must also understand from everyday practice which entity has the authority to set policies, affect the terms and conditions of employment, and direct the daily operations of the restaurant or retail franchise.
The NLRB decisions have the potential to change the fundamental nature of franchising relationships with respect to labor and employment relations. While the federal courts have yet to analyze or consider the present joint employer standard, franchisors must engage in a careful analysis of their agreements, practices, and relationships, including specifically their respective relationship to employees of the franchisees, in order to assess any potential ramifications. Failure to do so could result in a significant shift of risk and responsibility, with franchisors facing risks and responsibilities that did not previously exist in the franchise employee context.