Latest Development in Joint Employer Status in Franchising

In June 2014, General Counsel for the National Labor Relations Board (NLRB) filed an amicus brief in a matter before the NLRB involving Browning-Ferris Industries of California. In its brief, General Counsel proposed a new joint employer standard where the NLRB would find joint employer status, given all of the circumstances, where an entity exercised or possessed the power to exercise significant direct or indirect control over the employment terms and conditions of another’s employees, or where the entity was essential to meaningful collective bargaining with another’s employees. In December 2014, the NLRB issued complaints against McDonald’s and numerous McDonald’s franchisees as joint employers. The complaints allege that McDonald’s and its franchisees violated employee rights by retaliating against employees for seeking improved wages and working conditions. The NLRB asserted that McDonald’s “possessed and/or exercised control over the labor relations policies” of its franchisees and was a “joint employer” of the franchisees’ employees.

The NLRB’s amicus brief in Browning-Ferris and its complaints against McDonald’s have left many in the franchise world concerned about the ongoing status of franchise relationships, the foundation of which are franchise agreements that provide opportunities to franchisees to start and grow their own independent businesses using the licensed trademarks and business methods of the franchisor. By adopting a different joint employer standard, would the NLRB effectively destroy franchising in the United States?

On April 28, 2015, the NLRB’s Division of Advice provided insight on this issue. In response to an inquiry about the potential joint employer status of Freshii Development, LLC (Freshii), the franchisor of a fast-casual restaurant chain, and one of its franchisees, the NLRB discussed in detail the reasons why Freshii was not a joint employer of its franchisee’s employees. The NLRB’s analysis was fact specific and reviewed the role of the franchise agreement, the operations manual, training, evaluations and labor relations in determining joint employer status. Specifically, the NLRB noted that:

  • The franchisor clearly distinguished the mandatory portions of its operations manual from the portions that offered recommendations to franchisees.
  • The franchisor did not play a role in the franchisee’s decisions regarding hiring, firing, disciplining or supervising employees.
  • Although applicants could apply for jobs at franchised outlets via the franchisor’s website, the franchisor did not screen or analyze the applications before passing them to franchisees.
  • The franchisor did not determine the wages, raises or benefits of the franchisee’s employees.
  • While the franchisor supplied a sample employee handbook to its franchisees, it did not require them to use it, and indeed the franchisees used different employee handbooks with varying personnel policies.
  • Language in the franchise agreement gave the franchisee the freedom to decide whether to use the franchisor’s personnel policies or procedures.
  • The franchisor was not involved in scheduling and setting the work hours of the franchisee’s employees, even though the franchisor provided guidance on how to calculate labor costs.
  • The franchisor did not have any input in the scheduling algorithms or methods used in the franchisee’s scheduling software, and did not require all franchisees to use the same software.
  • The initial training provided by the franchisor dealt primarily with restaurant operations, and after the initial training, the franchisor was not involved in future training of the franchisee’s employees.
  • Evaluations of the franchisee were limited to inspecting the franchisee’s adherence to mandatory brand standards and were not used to examine employment-related policies, and these evaluations never affected the employment status of the franchisee’s employees.
  • When the franchisee’s employees attempted to unionize, the franchisor did not communicate with the franchisee about the organizing effort.
  • Finally, the franchisor was not in the practice of terminating franchise agreements for non-brand related reasons, including the franchisee’s terms and conditions for its employees.

It remains to be seen how the NLRB’s advice memorandum on the possible joint employer status of Freshii and its franchisees will impact the Browning-Ferris and McDonald’s matters. But the NLRB’s detailed analysis does allow us to provide the following recommendations for you to take to reduce the risk of acting as a joint employer of your franchisees’ employees. The key takeaway from the NLRB’s advice is that your franchise agreement, operations manual and interactions with your franchisees should all reflect their status as independent business owners who control their employees. We recommend that you:

  • Review your franchise agreement, operations manual, training materials, corporate policies and forms
    • These materials should highlight the independence of the franchisee as an independent business owner.
    • They should distinguish between your mandatory requirements and suggested recommendations for your franchisees.
      • When deciding what should be mandatory, ask whether compliance would directly affect a customer’s experience. If so, consider making it a requirement. If not, make it a suggestion.
        • All personnel policies should be recommendations. You should not mandate the work schedules of your franchisees’ employees. After initial training during an outlet opening, you should only provide training to their management-level employees.
      • All requirements should be accompanied by brand justification (i.e., why this requirement is necessary to protect the brand and maintain uniformity in customer experience).
  • Train and observe your staff.
    • Your staff must understand that franchisees are not employees, but independent business owners that are ultimately responsible for the day-to-day operations of their businesses.
    • Your staff should not have human resources-related involvement in franchisee operations.
      • They should not review or provide feedback on applications for employment at franchised outlets.
      • They should refer all complaints or questions from franchisee employees to the franchisee.
      • They should not get involved in collective bargaining efforts by the franchisees’ employees.
      • When visiting franchises, all feedback should be given directly to the franchisee or the franchisee’s management employees, and should focus on mandatory requirements for brand management.
  • Engage your franchisees.
    • Encourage them to identify their franchises as independently owned businesses on signs, webpages and customer order forms (such as menus or other materials).
    • Encourage them to share their status as independent business owners with their employees, customers, and communities.

If you would like advice on how to best implement the above recommendations, or if you have questions about the information we have provided, please contact a member of Moye White’s Franchise and Distribution Practice Group.