What the NLRB’s New Joint Employer Test May Mean for Franchisors

As expected, the NLRB yesterday issued its decision in Browning-Ferris Industries of California, 362 NLRB No. 186 (August 27, 2015) marking a sharp departure from the Board’s previous standard of joint employment. In late July, the office of NLRB General Counsel Richard Griffin issued a directive saying it would consider McDonald’s a joint employer with its franchisees in a number of unfair-labor-practices cases. That determination certainly raised the stakes for franchisors (and those with licensing or distributor relationships). The NLRB’s decision in the Browning-Ferris case creates even more uncertainty for

franchisors as the NLRB’s new indirect test could ensnare an ever-widening circle of companies. Under the former standard, a company had to have direct and immediate control over the working conditions of the employees of the separate company to be considered a joint employer. Under the new standard, a company may be deemed a joint employer if it exercises indirect control over working conditions or if it reserves the authority to do so.

So, what does this mean for franchisors? Unfortunately, there is no bright line rule. While the NLRB’s April 28, 2015 advice memorandum concerning the relationship between Freschii and one of its franchisees found no joint employer status under this new standard, that was based on the particular circumstances of that relationship. Thus, each franchisor - franchisee relationship needs to be evaluated in light of -- as the NLRB puts it -- the “industrial realities.”

To try to protect themselves from being considered a joint employer franchisors should evaluate all aspects of their contractual relationships (and their practices) to determine whether modifications are needed and feasible. The following are some things to consider.

The Agreement is important. While the terms of the franchise agreement will not be not determinative, they are important. Franchise, licensing and distributorship agreements (and other documentation such as manuals and handbooks, etc.) should make clear that franchisees/licensees are solely responsible for all employment and personnel matters, including soliciting, screening, hiring, firing, and scheduling employees. Agreements should also expressly disavow any control over the franchisee’s employment decisions.
Control the Brand, Not the Franchisee. Franchisors have a legitimate interest in protecting the quality of their brand and the products and services being offered. Franchisors are entitled to implement controls over the use of their trademarks, franchisee advertising, quality control and unit appearance issues, etc. Even if staffing levels are important to a proper operation, franchisors need to avoid even the appearance of control (direct or indirect) over personnel policies or actions. Operating guidelines should be focused on protecting the brand, not controlling the franchisee.
Practice What You Preach. Even if agreements and manuals disclaim control, franchisors must insure it is followed in practice. For example, during inspections, site visits, and audits, operational issues should only be reviewed with the actual franchisee or its designated manager and instructions or suggestions should not be given directly to the franchisee’s employees.
Check your technology. Franchisors often require franchisees to use specified computer systems and technology that provides franchisors with significant operational information. Be wary of technology that allows (whether actually used or not) a franchisor to monitor, for example, employee staffing, scheduling, etc.
Make Clear the Franchisee’s Independence. The franchisee’s employees and general public should know that they are employed by an independent owned and operated franchisee. The franchisor’s name or marks should not be used in the franchisee’s corporate name or in employment-related documents (i.e., applications, employment agreements, evaluations, etc.). Personnel handbooks should expressly state that workers are employed by the franchisee, not the franchisor.

Seyfarth Shaw LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from their professional advisers.