- The Franchise System in Peril: Joint Employer Status and the NLRB
- September 2, 2014 | Authors: Mark G. Kisicki; Colton D. Long
- Law Firms: Ogletree, Deakins, Nash, Smoak & Stewart, P.C. - Phoenix Office ; Ogletree, Deakins, Nash, Smoak & Stewart, P.C. - Minneapolis Office
Over the past few months, the National Labor Relations Board (NLRB) has taken a series of steps to dramatically broaden the long-standing standard of when a wholly-independent company (e.g., a primary contractor or franchisor) will be deemed a joint employer of the employees of another company (e.g., a subcontractor or franchisee). Although the NLRB has not yet changed the law, it is already acting as if the law had changed by authorizing complaints to be issued against an international franchisor, McDonalds, USA, LLC. Significantly, that company played no role in hiring, firing, disciplining, paying, or supervising its franchisees’ employees. The changes these NLRB actions signal will significantly affect a fundamental principle of our economy and our legal system: that wholly separate corporations are independent entities. Indeed, these changes will alter the landscape in which U.S. companies conduct business.
The first step the NLRB took to broaden the joint employer standard was to grant review of a regional director’s decision that had applied settled 30-year-old precedent. In Browning-Ferris Industries of California, Inc. d/b/a Newby Island Recyclery & FRP-II, LLC, d/b/a Leadpoint Business Services (No. 32-RC-109684), the NLRB invited briefs on the issue of whether one company, which had subcontracted certain on-site operations to a third party, was the joint employer of the subcontractor’s employees.
Ogletree Deakins, which is representing BFI in that case, argued to the NLRB that the regional director had correctly applied long-standing precedent under which one company cannot be deemed to be a joint employer of another company’s workers unless it shared or codetermined the terms and conditions of employment for the particular group of workers at issue. Moreover, as the Board had long held, to be deemed a joint employer, the control by the purported joint employer had to have been direct and immediate, meaning it had to have controlled or codetermined core employment terms such as wages, hiring, firing, disciplining, or supervising the employees at issue. In agreeing to review the regional director’s decision in Browning-Ferris, the NLRB asked the public to comment (through amicus briefs) on whether it should change the long-standing joint-employer definition, and, if so, what the new standard should be.
The NLRB’s Office of the General Counsel (OGC) submitted an amicus brief in which it argued that indirect control, such as that exercised by many prime contractors and franchisors, is sufficient to make a prime contractor or franchisor into a joint employer. The OGC argued that some entities contract-out certain operations but indirectly control the employment terms of their subcontractors’ or franchisees’ workers. For example, the OGC argued that franchisors indirectly control the wages that franchisees pay their workers by controlling numerous business variables, in addition to tracking franchisees’ labor costs, needs, and customer service records. Failing to treat such franchise businesses as the workers’ employers, the general counsel claims, “undermines meaningful bargaining by precluding employees from exerting traditional economic pressure on a company.”
Similar arguments apply to any entity that subcontracts out any of its operations on-site (as the primary contractor controls certain aspects of employment merely by controlling the facility in which the subcontractor’s employees work). Even when operations or component parts are subcontracted to third-parties off-site, the rationale applies if the primary contractor retains significant quality control over the subcontractor’s operations. Under the OGC’s proposed standard, a company that outsources janitorial services would be deemed a joint-employer of the janitorial company’ s workers.
Although the NLRB has not yet resolved whether it will change the joint-employer standard or the extent to which it will do so, the NRLB’s OGC is not waiting for the NLRB to change the law. Instead, the NLRB’s OGC took a second significant step down its course to change the joint-employer standard by directing that complaints be issued against McDonalds, USA, Inc., alleging that it is the joint employer of its franchisees’ employees and liable for any violation of the National Labor Relations Act (NLRA) that might be committed by the franchisees (which includes even the violations of a franchisee’s front-line supervisor).
If the Board adopts the OGC’s interpretation of what the joint employer standard will be, it will dramatically affect how businesses function and could wreak havoc on the U.S. economy. For example, franchising has long been viewed as an opportunity for individuals with entrepreneurial drive but limited capital to start their own businesses by benefiting from the significant value a franchisor can provide—such as trademarks, licensing, advertising, marketing methods, and a standardized business structure. The franchisee, in turn, pays licensing fees, royalties, and adheres to brand standards of the franchisor, while independently owning and operating its own business and controlling the day-to-day operations of the franchise, including labor and employment matters.
The OGC’s approach will dramatically change the entire foundation of the franchise model, rendering the franchisor liable for any alleged labor law violations committed by its franchisees’ supervisors and agents. The OGC’s suggestion will also make the corporate entity a target for corporate campaigns by international unions that are sophisticated in the technique of pressuring companies through publicity campaigns and legal challenges that have little relationship with workers’ protections, and, in fact, often cause workers to lose their jobs because of the costs associated with defending against these campaigns. Many commentators note that the likely result of a new joint-employer standard will be affect our economy negatively, as small business, including franchises, create fewer job opportunities.
Although the NLRB has not yet changed the law, businesses that outsource operations on-site or that outsource operations or production of components offsite while retaining substantial control over those operations or products should be alarmed by the NLRB’s radical approach to expanding the joint-employer standard. If the NLRB expands the standard to the extent urged by the OGC, courts will have a compelling basis to reject the standard as inconsistent with the clear language and statutory history of the NLRA. Given that a new standard has not been finalized, we recommend that businesses that currently are not joint employers under the current standard take the following precautions:
- Ensure to not inadvertently exercise direct and immediate control over the employment terms of the workers employed by subcontractors or franchisees.
- Ensure that contracts and franchise agreements specify that subcontractors and franchisees make all employment-related decisions.
- Require subcontractors and franchisees to comply with all relevant labor and employment laws.
- Examine operation requirements and product concerns to determine whether there are ways tominimize the way those requirements affect labor and employment policies and procedures.
- Give as much operational control to subcontractors and franchisees in their contracts and franchise agreements as the franchisor can tolerate.