Franchisor 101: Joint Employer Wars (The Final Episode?)

Lewitt Hackman

Last month, the National Labor Relations Board (NLRB) issued a final rule governing joint-employer status under the National Labor Relations Act (NLRA). The rule should resolve years of controversy over who is an employer under federal law and reduce franchisor concerns about being a joint employer of a franchisee’s employees.

Under the final rule, an entity may be considered a joint employer of someone else’s employees only if the two share or co-determine the employees’ essential terms and conditions of employment. “Essential terms and conditions of employment” are wages, benefits, hours of work, hiring, discharge, discipline, supervision and direction. This means a business must exercise “substantial direct and immediate control” over such matters to be a joint employer. The list is narrow and does not invite expansion to include typical franchisor actions, such as suggestions, observations or quality control standards. Control that is exercised on only a sporadic, isolated or minimal basis is not “substantial.”

The final rule also defines “indirect control” to exclude control or influence over setting objectives, ground rules or expectations. “Contractually reserved control” does not include authority that has never been exercised. Thus, under the final rule, indirect control and contractually reserved control can be relevant, but only to supplement and reinforce evidence of possessing direct and immediate control. Indirect and reserved control cannot substitute for direct control of essential terms of employment.

According to the NLRB, the “final rule restores the joint-employer standard that the Board applied for several decades prior to the 2015 decision in Browning-Ferris, but with greater precision, clarity, and detail that rulemaking allows.”

Many business relationships will still come under this definition of joint employer, like staffing companies and businesses that use staffing companies. But the final rule is a welcome reprieve for franchisors. The Board’s Browning-Ferris decision held that a franchisor could be a joint employer under the NLRA, exposing franchisors to federal and state employment law claims by franchisee employees. This decision upends long-standing precedent for the joint-employer test, which has now been restored and clarified.

The final joint-employer rule takes effect April 27, 2020. While it presents a path for franchisors in a typical franchise relationship to avoid being deemed to be employers of franchisees’ employees, it remains subject to Congressional review. And it does not apply at the state level, where California’s AB-5 and similar legislation in other states continue to pose risks to the standard franchise relationship.

Read: NLRB Standard for Determining Joint-Employer Status

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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