What the New Joint Employer Test Means for Franchises

In a move likely to have repercussions for franchise systems, this August the National Labor Relations Board expanded the test for determining when multiple employers are deemed “joint employers” for purposes of labor and employment rules.

The Browning Ferris Decision

By a vote of 3-2, In re: Browning Ferris Ind. of Cal. Ruled that BFI Newby Island Recyclery (“BFI”) and Leadpoint Business Services (“Leadpoint”) jointly employed certain workers of a recycling facility.

BFI, which owned the facility, contracted with Leadpoint to provide workers to manually sort the recyclables transported through the facility on conveyer belts, clean and unjam the sorting equipment, and clean the facility.

In considering decades of decisions on the issue, the board found convincing a previous standard set forth in the 1965 case Greyhound Corp.1 , which found a joint employment relationship when the employers “share[d], or codetermine[d], those matters governing essential terms and conditions of employment.” Consequently, the board reasoned, the potential for indirect control, even if unexercised, can be sufficient to find a joint employment relationship.

In applying the standard to the facts surrounding the relationships between BFI, Leadpoint and the workers, the board examined the management structure and practices in hiring, discipline and termination, scheduling and hours, work processes, wages and benefits, work processes, training and safety. Ultimately, the board ruled that BFI either exercised or, by way of the contract with Leadpoint, had the power to exercise control over the workers’ employment terms. Consequently, BFI was deemed a joint employer, and therefore must assume the responsibilities of one—in this case participating in organized labor negotiations.

Franchise Systems

Cliché or not, the American dream of owning a business is very much real and is what draws many franchisees to buy into a franchise system. When compared to starting a business from scratch, franchise opportunities offer pre-existing name recognition and a proven business plan.

For franchisors, the system allows simpler, less expensive, and faster expansion, and it frees the franchisor of running the day-to-day operations of franchisee locations.

Above all, the franchise system is built on a multi-actor framework, where a franchisor and each franchisee are distinct entities (be it an individual or, more commonly, a separate corporation).

However, the system would not be what it is without the cooperation and involvement between franchisors and their franchisees. Franchisors have to protect the brand not only from outside threats, but must ensure that franchisees are living up to the expectations from consumers who expect each franchise location to appear seamless. Franchisees, for many of whom it is a first-time experience running a business, look to the franchisors for training and support in operating the franchise location.

In fact, it is that vital interaction between franchisors and franchisees, the very bedrock of the franchising concept, that is at greatest risk from the Browning Ferris decision.

Impact of the Browning Ferris Decision

At first glance, Browning Ferris seems like more of a problem for franchisors. After all, the decision may make the franchisor responsible not only for negotiating with collective bargaining organizations, but may also extend to providing health care, wage and hour laws, and workers’ compensation. But franchisees are already direct employers of the workers at the franchise locations, so the impact of the board’s decision is less obvious.

Clearly, burdening a franchisor with the expense and complication of maintaining a suddenly and significantly expanded workforce is a problem. Therefore, they may be forced to substantially increase royalty payments from franchisees to provide insurance, human resources, and other unexpected services. While those locked into often decades-long agreements may not have to pay more, increased royalties look less inviting to prospective franchisees and threaten the growth of the system as a whole.

Perhaps worse still, franchisors fearful of being cast alongside franchisees as joint employers may withdraw a lot of the support for fear that it can be used as grounds justifying a joint employer relationship, greatly reducing the benefit of the franchisees’ purchases. Further, withdrawing support could prove fatal for fledgling franchisees and, ultimately, the entire franchise.

What’s Next?

While there are efforts underway, including those by franchise trade associations, supporting legislation2 that would constrict the definition of joint employers to exercise of actual, direct and immediate control, the outcome remains to be seen. Furthermore, Browning Ferris is a staffing case, not a franchise case, so there are still uncertainties as to how it would be applied in a franchise context.

In the meantime, franchisors and franchisees should take steps to prepare themselves for operating under the new test. Now is the time to revisit franchise relationships and examine them in light of the board’s decision. For example, franchisors should work with their legal counsel to ensure that quality controls put in place to maintain the brand are reasonably tailored and do not overstep into the realm of enforcement of employment policies. In addition, handbooks, training materials, and franchise agreements should be reviewed and, if necessary, revised.

Because any challenge to the distinction between franchisor and franchisee will be specific and fact-intensive, now is the time to ensure the system works in a way that fully supports the conclusion that the franchisor and franchisees are separate businesses.

While many critics have greeted the decision as the death knell of the franchise system, in reality this should be viewed as an opportunity for franchisors and franchisees to revisit their respective roles. Franchise systems remain a vital part of the American business landscape, and, with the proper adaptations, the Browning Ferris decision should not be seen as an existential threat.

1 Greyhound Corp., 153 NLRP 1488 (1965)
2 S.2015 and H.R.3459, both titled “Protecting Local Business Opportunity Act”

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