If your business involves franchising, you understand the rapidly, evolving regulatory landscape presents daunting traps for operators unfamiliar with the nuances of state and federal franchise laws. Navigating this already-challenging geography has become further complicated in the face of the new anti-business “joint employer” test created by the NLRB in 2015 in the Browning-Ferris case, and embraced by the U.S. DOL, which governs wage and hour rules and family leave obligation, and the EEOC, which enforces discrimination and retaliation laws.
The NLRB, which prosecutes employers for purported unfair labor practices, initiated litigation against McDonald’s (the franchisor) claiming it was responsible for alleged unlawful employment practices against its franchisees’ employees. The NLRB argued that McDonald’s was a co-employer because of the indirect influence it had on those employees by way of the policies, procedures, and rules it requires all franchisees to follow. Many have speculated that this move is a political one stemming from the current NLRB’s pro-union agenda.
Historically, the law shielded franchisors from such liability because they lack direct control over their franchisees’ employees. The Obama-era shift by the NLRB and other governmental agencies finds many franchise companies reconsidering aspects of the franchisor-franchisee relationship and seeking creative solutions to limit liability and risks of joint/single employer findings.
The challenge facing lawyers who advise franchise brands is how cautiously to navigate troubled waters with the hope of the regulatory calm promised by the new administration. On the one hand, a franchisor’s primary responsibility is to protect the brand and integrity of the franchise system as a whole. From that perspective, it is critical for the franchise company to maintain strong rules and policies to ensure that customers enjoy a uniformly great experience across locations. On the other hand, the position taken by the NLRB and other agencies makes clear that greater control by a brand owner, even if it is never exercised, may continue to be a contributing factor in the joint employer analysis.
What follows from this tension is the need to balance the quality and nature of controls exerted by franchise companies over their individual franchisees. For a trademark owner, it is critically important to protect the way the brand is used, as well as the quality of the products and services sold to customers under that brand. When these controls start to seep into matters of the employment relationship, the franchisor finds itself deeper within joint employer territory. As a result, experienced franchise attorneys typically seek ways to achieve that happy medium between dictating rules that ensure brand consistency and quality system-wide, while at the same time avoiding a nexus with the relationship between the franchisees and their employees.
Without much in the way of direct guidance from the NLRB or other authorities, finding the right balance between these concerns can prove elusive. The prevailing wisdom is that a franchisor should seek in its legal documents to tie its operational rules to brand-protection justifications, and leave it to individual franchisees to determine the way to direct their employees to follow those rules. By way of example, a franchisor probably will not be found a joint employer if its operations manual dictates what type and style of uniforms the employees must wear in order to protect its brand (although the NLRB has found uniforms can be a mandatory subject of bargaining). It certainly will find itself deeper in joint employer territory if the manual dictates employees’ hours, pay, and benefits. Balancing these competing concerns has become a critical task for franchise companies.
The future in this area remains uncertain, but it seems clear that these concerns will continue even in the face of the new administration. On March 9, 2017, The Court of Appeals heard argument in the appeal of the Browning-Ferris. Although many commentators believe the NLRB decision will be upheld until President Trump appoints new NLRB members, at least one Judge on the Court stated that the NLRB “dropped the ball” on its new theory. In any event, it is unlikely that the Court’s ruling will completely alleviate joint employer concerns for franchise companies. As a result, it will continue to be important for franchisors to be mindful of the potential risks in this area.
The devil is in the details, and unfortunately, there is no silver bullet to protect against these risks. Franchise companies should consult with legal counsel experienced in labor law and franchising to best arm themselves in this increasingly perilous environment.
Matt Kreutzer and Brandon Garrett are attorneys with Royal Oak, Mich.-based law firm Howard & Howard.
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