Understanding the NLRB's Joint Employer Rule and Its Impact on Franchising

In a landmark move that's set to reshape the franchise landscape, the National Labor Relations Board (NLRB) has issued a final rule regarding joint employer status under the National Labor Relations Act. This ruling, effective from December 26, significantly revises the criteria for determining joint employer relationships, with far-reaching consequences for both franchisors and franchisees.

Key Aspects of the New Rule

The National Labor Relations Board's new rule introduces a significant change in defining joint employer status. Initially, it posits that entities sharing or co-determining key employment terms can be deemed joint employers. Crucially, the rule extends beyond actual control of employment terms to the mere possession of such control authority, regardless of its use. This means that even potential or indirect control, possibly exercised through intermediaries, can qualify an entity as a joint employer.

This expansive approach includes a broad range of employment aspects under the umbrella of "essential terms and conditions." These include wages, work hours, job duties, supervision, employment rules, and even workplace safety and health conditions. Consequently, an entity could be considered a joint employer if it holds authority over any of these areas, significantly widening the scope from the previous rule's focus.

Previously, the 2020 rule emphasized direct and immediate control over employment terms to establish joint employer status. This allowed for more traditional business models, including franchising and third-party service agreements, without the risk of joint employer liability simply for having contractual rights to influence certain employment aspects. However, the latest rule marks a departure from this, placing many established business relationships under closer scrutiny and potentially altering the dynamics of joint ventures and franchise operations.

Implications for the Franchise World

• Increased Liability for Franchisors: Franchisors, now more than ever, risk being classified as joint employers. This expanded definition could mean increased bargaining obligations and potential liability for unfair labor practices, even in areas traditionally managed by franchisees.
• Impact on Franchise Relationships: The blurring lines in the joint employer status could affect the autonomy of franchisees. Franchisors might need to reconsider their involvement in operational aspects to mitigate joint employer risks.
• Contractual Agreements: Franchise agreements may require revisions to clearly delineate responsibilities and control aspects, ensuring compliance with the new NLRB standards.

The Long and Winding Evolution of the Joint Employer Rule

Tracing back almost a decade, the joint employer rule has seen significant shifts with varying administrative stances. In 2015, the NLRB decided to broaden the interpretation of joint-employer status, resulting in a threat to the franchised business model's mode of employment. During this period, franchises lost $33.3 billion each year, 376,000 jobs were lost and lawsuits increased by 93%. According to research conducted by Oxford Economics, 70% of franchisees expect increased litigation and costs due to the NLRB rule, while 66% believe the new standard will raise barriers to entry into the franchising sector.

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.

In February of 2020, the NLRB updated its joint-employer regulations once again, stating that 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. 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. But, just a few months later, the ruling was overturned once again.  

This time around, the NLRB is already being sued by a coalition of restaurant advocates over the new joint employer rule. The lawsuit claims the new rule is “overbroad” and says that it “threatens billions of dollars in liabilities and costs.” It also claims that the law rejects a limiting principle of the National Labor Relations Act, which is that a joint employer must “possess sufficient control over workers’ essential terms and conditions of employment to permit meaningful collective bargaining.” 

The IFA has also filed a lawsuit against the NLRB alongside 12 other trade groups. The lawsuit takes aim at the NLRB for exceeding the scope of its authority and violating the Administrative Procedure Act (APA) by failing to respond to comments regarding the rule’s harmful economic consequences.

Navigating the New Landscape

Franchisors and franchisees must adapt to these changes proactively. This includes revisiting franchise agreements, re-evaluating operational controls and possibly seeking legal counsel to navigate the complexities of this new rule. 

“We all need to have great attorneys — if these go into place, attorneys will be our best friends,” said Jerry Akers, franchisee of Great Clips* and The Joint Chiropractic, during a recent webinar with Franchise.org. “I did not get into franchising to share my responsibilities with corporate, I did it to use their systems and resources to succeed with my own business. That won’t be possible with this new ruling.”

Overall, the NLRB's new joint employer rule is a game-changer for the franchise industry. It demands careful consideration and strategic adjustments from both franchisors and franchisees. As the franchise world adapts to this evolving legal landscape, staying informed and agile will be key to thriving under the new regulatory regime.

“In order for us to get through this, franchisors need to educate everyone from top to bottom about what this means for them,” said Amy Cheng, Partner at Cheng Cohen LLC, during the webinar. “Franchisees also have an obligation to educate their employees about joint employment. That is just as important. If we educate on both of those fronts, my hope is that together we will be able to educate the public and get through this.”

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