Franchisers Continue to Face Joint Employment Risk

Franchise relationships have the potential to allow a franchiser’s innovations to quickly reach a broad geographic market without the enormous up-front investment that would otherwise be needed to establish a vertically integrated business presence in every market where demand exists.

The franchise model is particularly popular within the homecare industry where a strong presence in the local community is a significant competitive differentiator. Historically, this model has provided a certain degree of insulation for franchisers and franchisees from one another’s legal problems; since franchisees formally operate independent businesses, all parties generally expect that the franchiser will not be liable for the franchisees’ legal obligations, and vice versa.

However, that expectation can fail when a franchiser controls the franchisees’ operations to such a degree that the franchisees effectively become the franchiser’s agents. The impulse to control the franchisees’ operations usually stems from a desire for quality control; after all, a franchiser’s brand would quickly tarnish if the public associated it with a lack of quality, non-responsiveness or poor service.

When a franchiser directly engages in the day-to-day management of the franchisees’ employees, the franchiser may legally become the “joint employer” of all of the franchisees’ employees, meaning that any liability resulting from the franchisees’ incorrect understandings of complex labor and employment laws and regulations become the franchiser’s liabilities as well. This can be true even if the liability arises out of decisions the franchiser did not make.

Because of the ever-changing body of laws affecting employees’ rights in the homecare industry and the high costs of errors in the employment law space, franchisers should develop a thorough understanding of joint employment concepts in order to minimize the risk of unexpected liability for franchisees’ decisions.

Three Franchise Cases in Point

Generally, for a franchiser to become a joint employer of its franchisees’ employees, it must retain or assume a general right of control over factors such as hiring, direction, supervision, discipline, discharge and relevant day-to-day aspects of the workplace behavior. For example, a federal court in New York City recently held that employees of various Bareburger franchisees’ restaurants plausibly alleged that the Bareburger franchisers were their joint employers where they alleged that the franchisers guided franchisees on how to hire and train employees, set and enforced requirements for operation of franchises, monitored employee performance, and specified methods and procedures for employees to prepare customer orders.

Similarly, a federal court in Pennsylvania held that employees of Friendly’s Ice Cream franchisees sufficiently alleged a joint employment claim against the Friendly’s franchiser, based on allegations that the franchiser was actively engaged in the day-to-day operation of all Friendly’s restaurants, set the policies for all Friendly’s restaurants, “including policies relating to hiring, training, hours of work, overtime, timekeeping and compensation,” provided “ongoing operations support” to franchisees through “an assigned Franchise Business Consultant,” had the authority to hire and fire employees, supervised their work through quality assurance visits, and used the same payroll system at all franchisees’ restaurants.

By contrast, a federal court in California held that the McDonald’s Corporation was not a joint employer with at least one of its franchisees, even though the corporation required the franchisee to use specific timekeeping software and hired business consultants to monitor and advise the franchisee. The court found it important that the franchisee had the sole authority to make hiring, firing, wage and staffing decisions, and that the corporation’s recommendations to the franchisee on crew scheduling and staffing were merely “suggestions” rather than requirements.

The fact that the McDonald’s case produced a different result than the Bareburger and Friendly’s cases, despite many similar facts, shows the context-sensitivity of the joint employment analysis under wage and hour laws, and the difficulty of predicting an outcome in any particular case.

Obstacles in Determining Joint Employment Relationships

Adding to the complexity, not all employment laws use identical tests for determining the existence of a joint employment relationship. The three franchise cases in point all involved wage and hour disputes, but the civil rights statutes, the Family Medical Leave Act, and the Internal Revenue Code each present unique considerations and distinctions that franchisers must take into account. Additionally, the National Labor Relations Board (NLRB) has changed its official position on the standard for joint employment under the National Labor Relations Act (NLRA) three times in the last three years.

A Timeline for Understanding Joint Employment

From 1984 until 2015, the NLRB evaluated joint employment by assessing whether the alleged joint employers “shared or codetermined” the essential terms and conditions of employment, “including hiring, firing, discipline, supervision and direction,” and held that “[t]he essential element in this analysis [was] whether a putative joint employer’s control over employment matters is direct and immediate.”

Then, on August 27, 2015, the NLRB greatly expanded the scope of relationships that could potentially constitute joint employment, and held that “[r]eserved authority to control terms and conditions of employment, even if not exercised, is clearly relevant to the joint-employment inquiry,” and that “control exercised indirectly—such as through an intermediary—may establish joint-employer status.” Then, on December 14, 2017, the NLRB reversed its 2015 decision, and returned to its pre-2015 standard, though it ultimately found that the companies at issue were joint employers even under the pre-2015 standard. However, less than three months later, on February 26, 2018, the NLRB vacated its 2017 ruling, due to a finding by the Board’s Designated Agency Ethics Official that one of the members should have recused himself from participation in that case. Therefore, the NLRB’s more expansive 2015 ruling is once again the agency’s official interpretation of joint employment under the NLRA.

To help clarify and unify the standards for analyzing joint employment, the U.S. House of Representatives passed a bipartisan bill in November 2017 called the “Save Local Business Act,” which was designed to provide a single definition of joint employment under both the FLSA and NLRA which would require direct, actual and immediate control. That bill has not been the subject of any action in the Senate, and is therefore not yet law.

While the NLRB’s reversal of its onerous 2015 standard may have initially relieved some of the urgency motivating this bill, the most recent change in the NLRB’s position demonstrates the current instability of this area of the law, and passage of this bill would greatly clarify the legal standard for joint employment across legal contexts, and lessen the severity of future swings from the NLRB resulting from changes in the partisan makeup of the Board.

That said, even if the Save Local Business Act passed, it would not eliminate the risk of joint employment in the franchise context. Indeed, the NLRB’s 2017 decision (which would effectively be codified if the pending bill became law) ultimately found that the parties before the Board were joint employers even under the less exacting standard.

Bottom Line

Franchisers’ joint employment risk remains a live, fluid and significant threat, and franchisers should continue to critically assess any personnel-oriented quality control measures that potentially cross the line into creating unintended employment relationships with all of their franchisees’ employees.