A new joint-employer standard will increase the likelihood of union “corporate campaigns” against national franchisors and pressure franchisees to organize.

By Catherine Monson, CFE

I am passionate about franchising. I have seen franchising help tens of thousands of Americans achieve their dream of business ownership. Franchising is a large community of diverse businesses that operate using the franchise business model to distribute its products or services. Under this model, entrepreneurs own their own businesses and acquire the right to operate those businesses using the trademarks, products and business strategies of a proven franchise system. In the process, the franchisee also receives the right to use a business/operating plan which the franchisor has crafted for all of its outlets.

This business/operating plan outlines a system of marketing, production, operational and management standards that maintain brand quality and uniformity. While franchise businesses are very common in the restaurant and hospitality industries, franchising is also popular across numerous other sectors, including health and wellness, child care, education, plumbing, senior care, signage, business services, personal services, retail and automotive.

Franchising is a great American success story, however a franchise is not a guarantee of success. Successful franchisees determine the profitability of their enterprise by executing proven business plans, controlling their operating costs and managing the people who make this system work. 

The franchisee creates jobs that provide training and upward mobility for its employees. The employees work for the franchise owner, not for the corporate entity of the franchisor brand. The franchisee controls the hiring, firing, discipline, supervision, pay rates, schedules and direction of those employees. The franchisor has no input into the franchisee’s labor relations.

However, it appears that the federal government — the National Labor Relations Board in particular — either doesn’t understand this or is motivated for some other reason to undermine a successful business model that has generated untold economic benefits for millions of entrepreneurs and the people they employ.

How the NLRB Plans to Change the Rules

On July 29, 2014, the National Labor Relations Board’s general counsel announced that he had authorized complaints against numerous McDonald’s franchisees and McDonald’s USA as “joint employers” for alleged unfair labor practices. The NLRB general counsel’s decision to issue complaints against both McDonald’s franchisees and the franchisor marks a drastic change in the board’s precedent regarding the franchisor/franchisee relationship.  The general counsel is asking the board to impose liability on the franchisor for the labor relations of individual franchisees simply because the franchisor establishes general operational and brand procedures for the franchisees’ business, ignoring the fact that the franchisor has no involvement in or control over its franchisees’ employment practices.

The NLRB general counsel’s position disregards established laws regarding the franchise model. If franchisors are found to be joint employers, they would be liable for individual franchisees’ employment practices. Such a rule change could completely upend the franchise model and have devastating consequences for franchising as an economic force in the United States.

In fact, any change in the existing joint employer standard would significantly change the face of American business and impact every level of the supply chain. Multiple businesses and contractual relationships are based on this decades-old standard, which has been endorsed by Congress and the courts. Under the current standard, only legally separate entities that exert a significant and direct degree of control over employees — and their essential terms and conditions of employment — are considered joint employers. Essential terms and conditions of employment are those involving hiring, firing, discipline, supervision and direction of employees.

While the labor board has already issued complaints against McDonald’s, a look at the general counsel’s amicus brief in the pending Browning-Ferris case may illuminate the underlying rationale behind the joint employer issue. In that brief, the general counsel asserts that “the Board should abandon its existing joint-employer standard”. The general counsel also asserts that companies may effectively control wages by controlling every other variable in the business. The general counsel’s new standard shifts the analysis away from the day-to-day control over employment conditions to operational control at the system-wide level. Under the new standard, franchisors would be joint employers whenever the franchisor exercises “indirect control” over the franchisee. The focus would be on “industrial realities” that make the franchisor a necessary party to meaningful collective bargaining. The NLRB would find joint employment even though the franchisor plays no role in hiring, firing, pay rates, hours worked, scheduling or directing the franchisee’s employees.

Since brand standardization is the key to each franchise system, the general counsel’s proposed standard makes franchisors and franchisees particularly susceptible to joint employer findings. Virtually all franchisors prescribe operational procedures and requirements in their franchise agreements to preserve the quality and consistency of the products and services offered by franchisees and to maintain the value of their trademarks. However, the franchisor leaves the day-to-day management of the franchisees’ businesses to the individual small-business owners themselves.  Under each franchise agreement, the franchisee is solely responsible for hiring and firing its own employees, training them, paying their wages, and setting their work schedules and work assignments. 

The general counsel is asking the NLRB to adopt a test such that any form of operational control or standardization will automatically trigger joint employment liability. The implementation of the NLRB’s proposed new joint employer standard will likely cover the franchise model and define franchisees and franchisors as joint employers.    

The general counsel asserts that prior to 1984, the NLRB consistently found joint employment where one entity exercised direct or indirect control over terms and conditions of employment of another entity’s employees. With all due respect, the general counsel is wrong. In cases dating back over 40 years, the board has never treated franchisees and franchisors as joint employers. These cases have involved several different franchise concepts–restaurants, retail, automotive, and others–and have focused on different areas of the relationship between franchisees and franchisors. In each case, the board has consistently and unambiguously ruled that the limited control exerted by franchisors for the purpose of brand maintenance does not sustain a finding of joint employment. A joint employer finding is justified only when the franchisor is in a position to control the franchisee’s labor relations. The general counsel’s attempt to use operational control as the main factor for finding joint employment clearly changes decades of precedent for franchisors and franchisees. 

How the NLRB’s Joint Employer Standard Will Change Franchise Operations

Currently, the old joint employer standard continues to be the law. It is up to the five members of the NLRB itself to make any official change. But the general counsel’s decision to issue a complaint against one of the country’s leading franchisors puts all franchise businesses on notice. If the NLRB adopts the general counsel’s proposed rule, the board will inject itself into complex business relationships that are completely unrelated to labor relations. Doing so casts doubt on its status as a neutral enforcer of the law.

When joint employer status is established, both entities may be liable for the other’s unfair labor practices, including unlawful discipline or discharge of employees under the National Labor Relations Act.  Faced with potential liability for their franchisees’ employment decisions, franchisors may be forced to exercise operational control over all the employment and human resource decisions of franchisees, undermining the franchise business model.

Franchisees are owner-operators with a financial stake in the business.  Without the ability to decide to hire and fire those employees who work for them, and oversee employee performance, there is less incentive for the franchisee to participate in the business model. This increased franchisor control would significantly disrupt the franchise relationship. Franchisors, too, would have less incentive to participate in the business model going forward if they were responsible for areas of operation historically reserved to and exercised by their franchisees.

A new joint-employer standard will make it easier for unions to organize multiple franchisees of a single franchisor and perhaps this is the true motivation of the NLRB.  A new joint-employer standard will increase the likelihood of union “corporate campaigns” against national franchisors and pressure franchisees to organize. As in the McDonald’s case, union agents and community representatives engaged in corporate campaigns often use the NLRB complaint process as a weapon against employers. Individual franchisees will be involved in a long, expensive legal battle for neutrality.  Franchisees cover their own operational expenses, including their legal bills. These small businesses cannot bear the cost of these fights and would likely be forced out of business. If the franchisor is forced to increase its control over franchisees’ employment conditions given its ultimate joint employer responsibility for the franchisees’ employees, the franchisor could face increased liability under other statutes.

Another destructive extension of the NLRB joint-employer definition, if implemented, is increasing costs for the local franchisee small-business owners as employees try to jointly sue the franchisee and franchisor; with the indemnity provisions in most (if not all) franchise agreements, this creates higher costs for the franchisee to bear both their own legal costs for their attorney and to indemnify the franchisor. This will result in two sets of attorneys involved so costs increase for separate counsel for the franchisee and franchisor and, in most cases, those fees from the franchisor’s attorneys will be passed on to the franchisee per the franchise agreement, further negatively impacting franchisee profitability. Many franchisee-owned businesses could go out of business.

Under the proposed new standard, to protect themselves, franchisors would need to amend their franchise agreements to limit the operational control the general counsel now would find to be dispositive of joint employer status. A challenge here: most franchise agreements run 10- to 20-year terms; the franchisor would likely be required to wait for the term of each franchise agreement to expire before a new contract that protects the franchisor from the new joint-employer definition could be implemented, franchisee by franchisee.

In an attempt to protect themselves and to avoid potential coverage under the operational test, franchisors will likely reduce involvement with franchisees on the local level, avoid training franchisee employees on brand standards, avoid enforcing operational requirements, avoid standardized employee handbooks and loosen rules regarding franchisee termination. All of these changes would negatively impact brand quality and uniformity and significantly undermine the entire franchise model. In addition, the changes would remove the positive operational tools and support the franchise model provides to individual business owners.

The new rules could dampen franchising efforts and economic growth. Franchise businesses are adding jobs faster than the rest of the private sector. Under the current standard, franchise businesses will add 247,000 new direct jobs this year, a 2.9 percent increase to 8.8 million direct jobs, over last year. That is on top of the 235,000 franchise jobs that were added in 2014. Additionally, the number of franchise establishments will grow this year by 12,111, or 1.6 percent, to 781,794. However, if franchisor and franchisee liability increases under new joint-employment rules, those new jobs may evaporate. Because of the unanticipated high costs to franchisors and franchisees, franchisors will stop selling franchises and franchisees will stop buying. Without the franchise model, individual entrepreneurs would be deprived of the opportunity to own their own business, franchisors would be denied the opportunity to expand their business, and millions of jobs will be lost. 

The cumulative cost of additional liabilities and litigation that a new joint-employer standard would bring, along with the dampening of franchise sales and growth, could force many franchisors out of business. Franchise growth would likely halt, and product quality would suffer without the franchisor’s mechanisms to maintain brand standards.  Local franchisees would suffer, as would the hundreds of thousands of workers they employ. This “domino effect” demonstrates that the repercussions of revising the joint-employer standard are grave, and they are far-reaching. 

I believe, as does the IFA, that the NLRB general counsel’s new joint employer standard would have a devastating effect on the franchising industry, entrepreneurship and franchise jobs.

Catherine Monson, CFE, is chief executive officer of FASTSIGNS, IFA’s 2014 FAN of the Year and a member of IFA’s Board of Directors. 

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