Overturning over 30 years of precedent, the National Labor Relations Board (NLRB) on August 27, 2015, “refined” its test for determining whether two separate and independent business entities are a “joint employer” of the same employees.  The board’s decision greatly expands who may be considered to be a joint employer and, as the dissent predicts, could be “hugely disruptive” to the franchise industry.

The NLRB’s Decision in Browning-Ferris Industries of California

In a 3-2 decision in Browning-Ferris Industries of California Inc., 362 NLRB No. 186 (Aug. 27, 2015), the board concluded Browning-Ferris Industries of California Inc. was a joint employer of workers provided by staffing agency Leadpoint Business Services Inc. at a BFI recycling plant.  The board overturned a regional director’s 2013 finding that Leadpoint was the sole employer of the workers it supplied to Browning-Ferris.  The board “restated” the joint employer standard and concluded the two companies were joint employers.  Although arising in the context of a staffing agency, the board’s decision and expansion of the joint employer test will have a broader reach and may impact other business relationships, including franchise and dealer relationships.  Indeed, as explained below, the NLRB is virtually certain to apply this same expanded standard in actions against franchisors relating to employees of franchisees.

According to the board, two or more separate business entities are joint employers of a single workforce if (1) “they are both employers within the meaning of the common law” and (2) “they share or codetermine those matters governing the essential terms and conditions of employment.”  While the “essential terms and conditions of employment” have long been considered to be “hiring, firing, discipline, supervision, and direction,” the majority declared the non-exhaustive list also includes things like “dictating the number of workers to be supplied; controlling scheduling, seniority, and overtime; and assigning work and determining the manner and method of work performance.” 

The central issue is control.  The decision expands the circumstances in which a joint employer relationship will be found by including (1) the right to control, even when never exercised, and (2) indirect control.  Since 1984, the NLRB has focused on whether a putative joint employer actually exercises direct and immediate control over the essential terms and conditions of the relevant workers’ employment, such as hiring, firing, discipline, supervision, and direction.  The majority overturned this decades-old standard, stating that requiring direct control and actual exercise of authority “significantly and unjustifiably” limits the circumstances in which a joint-employment relationship could be found.  According to the majority, “[r]eserved authority to control terms and conditions of employment, even if not exercised, is clearly relevant to the joint-employer inquiry.”  Thus, the hypothetical right to control, even if never exercised, may now be sufficient to find a joint employer relationship.  Further, following last week’s decision, the NLRB no longer requires control be exercised directly and immediately.  “If otherwise sufficient, control exercised indirectly—such as through an intermediary—may establish joint-employer status.” 

Applying the restated standard, the board found Browning-Ferris and Leadpoint were joint employers of the workers at issue.  The factors on which the board focused are instructive, including the ability of Browning-Ferris to set standards on whom Leadpoint could hire, to influence termination decisions, to impact scheduling and the number of workers, to affect daily working conditions by controlling the speed of the line, and to provide instructions on performance of work, both directly and through Leadpoint supervisors.  For additional information about the NLRB’s decision in the context of a staffing agency, read here.  As discussed below, franchisors and manufacturers should evaluate their contracts and actions in light of this new standard. 

An Impassioned Dissent

An impassioned dissent chastises the majority for rewriting and expanding “the decades-old test” for determining whether two separate and independent entities are “joint employers” of certain workers.  The dissent warns “[t]his change will subject countless entities to unprecedented new joint-bargaining obligations that most do not even know they have, to potential joint liability for unfair labor practices and breaches of collective-bargaining agreements, and to economic protest activity, including what have heretofore been unlawful secondary strikes, boycotts, and picketing.”

The NLRB’s revised standard is likely to be challenged in court, whether by Browning-Ferris or another company deemed to be a joint employer under the expanded standard. 

Browning-Ferris Is “Momentous and Hugely Disruptive” for Franchising

While Browning-Ferris involves a staffing agency, the decision will have far-reaching consequences for franchisors, dealers, manufacturers, and other types of businesses.  As the dissent points out, “the potential impact of [the NLRB’s new] standard on franchising relationships . . . will almost certainly be momentous and hugely disruptive.”  Browning-Ferris, 362 NLRB No. 186, at 45.  In the near future, the revised standard will be applied to several matters in which McDonald’s USA, LLC—the franchisor of the McDonald’s franchise system—is alleged to be a “joint employer” liable for unfair labor practices allegedly committed by individual franchisees. 

In December 2014 and February 2015, the NLRB’s general counsel initiated several complaints against McDonald’s USA and its franchisees alleging that certain McDonald’s franchisees violated the rights of their employees by, among other things, making statements and taking actions against them for engaging in activities aimed at improving their wages and working conditions, including participating in nationwide fast food worker protests during the past two years. 

As discussed in a prior update, the NLRB’s complaints against McDonald’s USA provide almost no substantive guidance as they simply note that McDonald’s USA had a franchise agreement with each franchisee and declare, without elaboration, that McDonald’s possessed or exercised control over each franchisee’s labor policies.  Elsewhere, the NLRB’s general counsel has hinted that it was McDonald’s USA’s use of technology that allowed it to make real-time staffing recommendations to individual franchisees based on real-time restaurant revenue that captured the NLRB’s attention.  The general counsel’s actions against McDonald’s USA are currently pending before an administrative law judge.   

Advice for Franchisors to Minimize Liability

Under the NLRB’s “restated” test, even franchisors with only indirect and limited control over a franchisee’s workers could arguably be deemed a joint employer subject to collective bargaining and liable for the franchisee’s labor practices.  Further, the effects could go beyond labor issues, potentially affecting vicarious liability standards under general tort actions as well as state taxation of franchisors.

In light of the NLRB’s decision, there are steps a franchisor should take to minimize its risk of being declared a joint employer of its franchisees’ employees.  These steps will also reduce the risk of a finding of common law vicarious liability for a franchisee’s employment practices in most states:

1. Clear Documentation Disclaiming Right to Control Franchisee’s Employees:  Franchisors should review their franchise agreements and other documentation for evidence of actual or reserved control regarding a franchisee’s employees.  Franchise agreements and other documentation, including manuals and handbooks, should make clear that franchisees are solely responsible for all employment and personnel matters, including soliciting, hiring, firing, staffing, scheduling, and managing their own employees.  Franchisors should expressly disavow in writing any right to control employment and personnel matters and decisions.  Language regarding a franchisee’s employees, such as particular hiring standards, should be phrased as recommendations instead of requirements. 
2. Avoid Actual Control Over Franchisee’s Employees:  Franchisors should, in practice, implement only those controls necessary to protect the goodwill of the brand.  Though the reach of the NLRB’s Browning-Ferris decision will not be known for some time, franchisors should still be entitled to implement controls over trademark, advertising, quality control, and unit appearance issues.  On the other hand, franchisors should avoid actual control over personnel policies or actions, including the hiring, firing, disciplining, and scheduling of the franchisee’s employees, whether direct or indirect.  Similarly, franchisors should be wary of technology that allows a franchisor to monitor and potentially intervene in employee-scheduling issues in real time.  
3. Limit Contact with Franchisee’s Non-Management Employees:  Franchisors should limit interactions with a franchisee’s non-management employees.  When conducting inspections and site visits, the franchisor’s personnel should review operations only with the franchisee or its manager.  The franchisor’s personnel should give directions or suggestions directly to the franchisee’s owner or manager and not to its employees.  Because indirect control may trigger joint employment status, any such directions or suggestions should be focused on issues necessary to protect the goodwill of the brand, not the franchisee’s employment or personnel matters.  
4. Announce Independent Relationship:  Franchisors should take steps to ensure that the franchisee’s employees and general public know they are employed by the independent franchisee and not by the franchisor.  For example, franchisors should require franchisees to place conspicuous signage stating that the unit is independently owned and operated.  In addition, franchisors should prohibit franchisees from using the franchisor’s name or marks in the franchisee’s corporate name or in employment-related documents, such as applications, employment agreements, evaluations, etc.  If a franchisee imposes a personnel handbook on its employees, then the franchisor should request that the handbook expressly states that the worker is an employee of the franchisee—not the franchisor—and that the franchisor does not possess the right to control the employee’s performance of duties, scheduling, or other conditions of employment.

Perkins Coie will continue to monitor the NLRB’s position regarding the joint employer standard and how it affects franchisors.