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Joint Employer Ruling Continues to Cause Disturbing Legal Consequences for Franchisers

This article appears as an update to previous editorials expressing my viewpoints relative to escalating franchise litigation globally. Three years ago, the National Labor Relations Board overturned a long-standing rule: 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.

It wasquickly picked up by some state agencies by applying the NLRB Rule to workplace safety and other issues.

And, as previously reported in my prior articles, private plaintiffs’ lawyers are seizing upon this new and promising method 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 how does all this affect 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. To some extent, poorly drafted franchise agreements have contributed to this potential liability.

Since that first ruling there have been numerous 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.
The best example is the action against McDonald’s following 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.” Thus, this was considered to be joint liability.

As I have written in previous articles concerning franchise litigation, 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 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.

Finally, most large (and some not so large) franchisors are expanding globally and thus subject themselves to the judicial and legislative regimes of other governments. Increasingly, those international bodies have been turning towards a joint employer standard.

This potential liability will certainly be fertile ground for future litigation and potential liability for franchisors.

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