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Back from the precipice, yes, but still it’s wise to watch your step


Philip Zeidman

Illustration by Jonathan Hankin

Anyone who has followed franchising developments in recent years knows of the joint employer issue—the effort to treat the employees of franchisees as also the employees of the franchisor, with the extensive legal and managerial consequences that would flow from such a change in the law.

A quick survey of the latest developments may be in order. At the National Labor Relations Board itself, the Browning-Ferris decision, which is the triggering point for the joint employer dispute, remains on appeal.  In the interim, the board’s Division of Advice concluded, based on the facts presented, that one franchisor was not a joint employer under either the board’s traditional test or the new test proposed by its general counsel.  

But the NLRB is at war with McDonald’s on numerous fronts on this issue. In the meantime, McDonald’s has been successful in a number of cases in persuading courts it should not be viewed as an employer of its franchisees’ employees, and has defeated or settled efforts to hold it liable under the theory of ostensible agency.

One of the more significant steps toward returning the discourse to the traditional position is the announcement by the new secretary of labor of the withdrawal of the department’s “informal guidance” on joint employment. This guidance impacts a different law, the Fair Labor Standards Act. It is to some degree symbolic, but the symbol is an important one: a new administration that will certainly move in a different direction than its predecessor.

But there are limits to what the Trump White House can do. Any changes at the NLRB will take time. As to the new members now being advanced (to replace old members whose terms expired) confirmations are required, and precedent-setting actions can only take place when the appropriate dispute reaches a stage where a decision can be rendered.  But the sense of “stepping back from the precipice” is palpable.

Around the globe

Less well reported have been the developments outside this country.  Let's take a look:

Just to the north, in Canada, two developments took place in rapid succession, after a protracted series of discussions. First, the Ontario government released its Changing Workplaces Review Final Report. It did recommend a number of steps that could facilitate unionization and collective bargaining for the employees of Ontario franchisees, and unquestionably identified franchising as a target of its concern (even referring to the “fissured workplace,” which we have seen in the literature in the U.S.).

It did not, however, depart from the current approach, and specifically rejected the adoption of a new joint employer status.  Remarkably quickly, the Ontario government announced its intention to introduce legislation. What is critical in this context is that the government does not recommend a blanket “joint employer” status for franchising.

Now let’s head south, to Brazil. One of the most active franchise markets in the world, it is characterized by a heavy concentration of indigenous franchisors. Nonetheless, the major multinational franchisors are represented there, and, as elsewhere, McDonald’s is a target of those seeking to use the joint employer characterization as a weapon.  

The Brazilian franchise law explicitly characterizes a franchise as one which is “without ... an employment relationship.” Concern arises principally when one party exercises “hierarchical subordination or control” of the employees of another. A number of Brazilian court cases have identified precisely that sort of conduct, and held to be the basis of a joint employer characterization. The rise of class actions has raised the ante in this area, and the McDonald’s case has received the most public attention.

The Brazilian Franchise Association, in an effort to quell this growing concern, has supported a proposal for a new franchise law, in the form of a Franchise Disclosure Act. It calls for an explicit legislative directive that “a franchise shall not characterize a consumer relationship, ‘economic group’, nor characterize an employment relationship, between the franchisor and the franchisee or the franchisee’s employees.” At the time of this writing the bill had not been enacted, but prospects were viewed as favorable.

Across the Atlantic, in France, we witnessed a convoluted battle over a Labour Law, involving both the parliament and the courts.  The resultant law still has much in it to frustrate franchisors in terms of process, but the franchisor community achieved what it sought in the joint employer battle itself: the recognition that franchisors and franchisees are not co-employers, but independent entities. The twists and turns of this episode are a reminder of how narrowly the franchising industry in a major market came to the nightmare of the franchise model being viewed as one of joint employment.”

Several oceans away, in Australia, we’ve seen more legislative activity affecting franchising over a period of recent years than in any other country, in recent months almost inextricably intertwined with other political and social issues.  Those most prominently include concern over the underpayment or “exploitation” of workers in industries in which franchising figures largely, exacerbated by some highly publicized activity at one especially well-known franchisor. As of this writing there continues to be debate—hot at times—over such issues as whether franchising will be singled out from other models and under what circumstance a franchisor may be liable.

Insecure footing

So where does that leave us? With the strong sense that only a legislative fix will provide assurance. Yes, in several important markets we have indeed moved back from the precipice. But the footing is insecure and the abyss remains large and threatening. The best advice continues to be: Be careful where you step.

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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