Recent Court Ruling Brings ‘Joint Employer’ Threat Back to Franchising

Franchisors could once again be sued for the employment practices and policies of their franchisees as the result of a federal judge’s decision this week to overturn the Trump Administration’s redefinition of “joint employer,” a legal standard the franchise community has struggled with for years.

In February, the National Labor Relations Board (NLRB) published a final rule updating its joint-employer regulations. According to the new ruling, franchisees could be considered a joint employer of an operator's employees only if the franchise maintained “substantial control” over the workers' essential terms of employment. The NLRB defined these essential terms exclusively as “wages, benefits, hours of work, hiring, discharge, discipline, supervision and direction.” 

This assured franchisors that they wouldn’t be repeatedly dragged into court by employees looking to sue a big corporation for alleged violations of federal labor regulations. Franchisees also expressed relief that they could continue to oversee the responsibility of recruiting and maintaining a staff, instead of having to involve a franchisor that might have no familiarity with the local labor market.

The ruling came after years of concern over non-compliance following the board's decision to broaden the interpretation of joint-employer status in 2015. After the NLRB expanded the joint employer definition, joint employer lawsuits increased 93% and cost individual franchise businesses an average of $42,000, according to the International Franchise Association. In fact, many foodservice franchisors considered cutting back on or halting franchising entirely to avoid this increased liability.

In December of 2019, the NLRB began showing signs of moving toward reducing franchisors' responsibility over their operators' infractions. McDonald’s — the largest fast food chain in the world — won an appeals case in which the NLRB ruled the brand was not considered a joint employer and therefore should not be subjected to penalties for labor violations alongside its franchisees.

Overall, the updated regulatory landscape brought relief to established franchisors and independent businesses that were looking to expand through franchising. Still, many worried these updates could be discouraging to labor groups that have tried to hold corporate restaurants accountable for the bad actions of their operators. 

Now, the U.S. District Court Judge Gregory Woods has overturned the redefinition, saying Labor failed to explain adequately why its interpretation of “joint employer” had changed. The ruling also asserted that the new standard is not consistent with the Fair Labor Standards Act, the nearly 100-year-old piece of legislation that set up such protections for workers as a federal minimum wage, a limitation on weekly hours and the National Labor Relations Board.

The plaintiffs argued that the new definition denied workers a chance to push back on unfair operational policies that were handed down to franchisees by their franchisors, which many argue have an impact on staff duties and responsibilities. 

According to Jonathan Barber, Esq., Managing Attorney at Franchise.Law, this redefinition, while inconvenient, won’t really change much for most franchisors. “It was nice for the NLRB to clarify its definition of a joint employer, however, the real test is whether a franchisor has too much involvement in its franchisees' human resource practices,” he said. “If a franchisor prescribes a minimum number of employees and basic qualifications for them, they shouldn't be afraid of being labeled a joint employer. However, if a franchisor itself interviews each of its franchisees' prospective employees, conducts background checks, trains the employees and otherwise participates in the overall management of those employees, they'll most likely be found to be a joint employer. The best practice is for franchisors to give minimum staffing guidelines and to let their franchisees handle all of their employment needs.”

While the ruling may just put franchisors back to where they started, it will likely still prove frustrating to the franchise community, which has seen a more-favorable joint employer standard be adopted and then repealed multiple times. The International Franchise Association (IFA) and other groups have even pushed to stop this constant back and forth by having Congress set a definition as law, which would prevent a rewrite of the definition every time control of the White House should shift from one political party to another.  

Luckily, the recent ruling doesn’t necessarily spell disaster for franchisors, who are already struggling amid the pandemic. “This court decision basically challenges whether the NLRB properly implemented its new definition of a joint employer,” said Barber. “It doesn't set a new standard, holding that all franchisors are joint employers simply by virtue of their franchise relationship. That would be catastrophic.”