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Not over ‘til it’s over, and joint employer issue is far from end game


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Philip Zeidman

Illustration by Jonathan Hankin

Tired of reading about the “joint employer” doctrine and how it affects franchising? Well, I’m afraid that’s just too bad, because it’s still with us and may continue for some time to come...and, maybe, all over the world.

First, a quick review. More than three years ago, the National Labor Relations Board overturned a long-standing rule, that an employer of its own workers could not also be viewed as the “joint employer” of the workers of companies it relied upon to supply it or to perform other functions it would otherwise need to do itself.  

The NLRB in that case held that, contrary to the previous rule, a company need only exert “indirect control” over such workers, frequently interpreted to mean simply that it had the power to do so, even if it never exerted that power.

That change of position had two consequences. First, it meant that such companies were in jeopardy of violations of labor law themselves. Second, the company could now, as a practical matter, be forced to collectively bargain with those workers—not only with respect to wages, but also as to a range of other labor practices.

States get in the act

And that was just the beginning. It was applied to workplace safety and other issues, and it was quickly picked up by state agencies and by private plaintiffs’ lawyers who seized upon this new and promising way to organize workers receptive to association with unions that would otherwise be unable to reach them because they were too small and unrelated to warrant the effort.

Much of this activity has to do with inter-corporate arrangements such as staffing agencies. But what does all of this have to do with franchising? The answer is pretty straightforward. Every franchisor has a relationship with its franchisees that could be mistaken, with potentially devastating consequences for the franchisor, as a joint employment arrangement.

Since that first ruling there have been a raft of actions at the state level and in the private arena. Some of these were the product of vigorous efforts made by the International Franchise Association, to persuade state legislatures to adopt laws mandating adherence to the previous and more practical rule. Some activity has been of a less political nature, and some has been distinctly hostile to the franchising model.  

Perhaps the best example is the action against McDonald’s, following hard on the heels of the NLRB’s decision. The then-general counsel of the NLRB approved unfair labor practice complaints to proceed against McDonald’s, authorizing 43 local unfair labor practice complaints, including several alleging the company punished franchisee workers for participating in a wave of protests aimed at fast food employees beginning as early as 2012.

The NLRB said the complaints were issued because McDonald’s “tools, resources and technology” are used to wield “sufficient control over the franchisees’ operation, beyond protection of the brand”—ergo, joint liability.  

And, of course, the theoretical relationship between this legal theory and the notion of “vicarious liability” has energized plaintiffs’ lawyers to ramp up the litigation against franchisors. The McDonald’s cases are still being litigated and a number of cases against other franchise companies are in process, some of them so far dismissed.

The IFA has concluded the only sure solution is a legislative fix at the federal level. In a notable victory for franchisors, the U.S. House of Representatives has enacted a law essentially restoring the original and more common sense rule. At the time of this writing it is uncertain whether the U.S. Senate will follow suit. And, unless and until they do, franchisors remain in jeopardy.

What many franchisors, absorbed with their own concerns, have overlooked is that the NLRB decision was not a franchise case at all. A reversal of that ruling seemed almost inevitable with a Republican majority of the board being reached in late September, but the speed of the ruling was not expected.

In the case of a franchisor, that means the company cannot be held to be a joint employer unless it exercises direct and immediate control over the franchisees’ employees, restoring a long-standing rule to that effect. Thus, indirect influence—such as requiring the franchisee to use software dictating certain scheduling features—would be inadequate.

But this simplistic analysis leaves much to be explored. Some of the questions that will be considered in the coming days:

- Are there not franchisors who today exercise actual control, going beyond “indirect influence,” and should not they be concerned about a “joint employer” characterization?  The answer would appear to be “absolutely.”

- Doesn’t the decision of the board that two of the companies charged were in fact “joint employers” and therefore jointly and severally liable for the conduct in question, give one pause?

- The new standard requires the control exercised by the franchisor over the franchisee must be in a form that is not “limited and routine.” What exactly does that mean?

- How much risk is there that a newly constituted board, ultimately with the majority of a different political party, will restore the just-reversed ruling?

- Finally, most large (and some not so large) franchisors are expanding internationally, and thus subject themselves to the judicial and legislative regimes of other governments. Increasingly, an issue to which those bodies have been turning is that of a joint employer standard.

Most recently the Australian Federal Parliament, while not going so far as to adopt the joint employer doctrine, created direct franchise exposure to regulatory penalties. But how many legislative and judicial bodies (or lawyers) in foreign countries pay attention to a decision (and 3 to 2 at that) that does not directly deal with franchising?

So, yes, I think the arguments will be with us for a long time to come.

Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office. Reach him at 202.799.4272 or philip.zeidman@dlapiper.com.

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