Overturning more than 30 years of precedent, the National Labour Relations Board (NLRB) recently refined its test for determining whether two separate and independent businesses are joint employers of the same employees. The decision greatly expands the range of companies that may be considered joint employers and, as the dissenting opinion predicts, could cause severe disruption in the franchise industry.

Browning-Ferris

In its three-to-two decision in Browning-Ferris Industries of California Inc (362 NLRB 186, August 27 2015), the NLRB concluded that Browning-Ferris was a joint employer of workers provided by staffing agency Leadpoint Business Services Inc at a Browning-Ferris recycling plant. The NLRB overturned a regional director's 2013 finding that Leadpoint was the sole employer of the workers that it supplied to Browning-Ferris. The NLRB "restated" the joint employer standard and concluded that the two companies were joint employers.

According to the NLRB, two or more separate business entities are joint employers of a single workforce if:

  • "they are both employers within the meaning of the common law"; and
  • "they share or codetermine those matters governing the essential terms and conditions of employment".

While the "essential terms and conditions of employment" have long been considered to be "hiring, firing, discipline, supervision, and direction", the majority declared that the non-exhaustive list also includes responsibilities such as "dictating the number of workers to be supplied; controlling scheduling, seniority, and overtime; and assigning work and determining the manner and method of work performance".

The central issue is control. The decision expands the circumstances in which a joint employer relationship will be found by including:

  • the right to control, even when never exercised; and
  • indirect control.

Since 1984, the NLRB has focused on whether a putative joint employer exercises direct and immediate control over the essential terms and conditions of the relevant workers' employment, such as hiring, firing, discipline, supervision and direction. The majority overturned this decades-old standard, stating that requiring direct control and actual exercise of authority "significantly and unjustifiably" limits the circumstances in which a joint employment relationship could be found. According to the majority: "Reserved authority to control terms and conditions of employment, even if not exercised, is clearly relevant to the joint employer inquiry." Thus, the hypothetical right to control, even if never exercised, may now be sufficient to find a joint-employer relationship. Further, the NLRB no longer requires control to be exercised directly and immediately: "If otherwise sufficient, control exercised indirectly—such as through an intermediary—may establish joint-employer status."

Applying the restated standard, the NLRB found that Browning-Ferris and Leadpoint were joint employers of the workers at issue. The factors on which the board focused are instructive, including Browning-Ferris's ability to:

  • set standards on whom Leadpoint could hire;
  • influence termination decisions;
  • affect scheduling and the number of workers;
  • affect daily working conditions by controlling the speed of the line; and
  • provide instructions on performance of work, both directly and through Leadpoint supervisors.

Impassioned dissent

An impassioned dissenting opinion chastised the majority for rewriting and expanding "the decades-old test" for determining whether two separate and independent entities are "joint employers" of certain workers. The dissent warned:

"This change will subject countless entities to unprecedented new joint-bargaining obligations that most do not even know they have, to potential joint liability for unfair labor practices and breaches of collective-bargaining agreements, and to economic protest activity, including what have heretofore been unlawful secondary strikes, boycotts, and picketing."

The NLRB's revised standard is likely to be challenged in court, either by Browning-Ferris or by another company deemed to be a joint employer under the expanded standard.

"Momentous and hugely disruptive"

Although Browning-Ferris involves a staffing agency, the decision will have far-reaching consequences for franchisors. As the dissent points out: "the potential impact of [the NLRB's new] standard on franchising relationships... will almost certainly be momentous and hugely disruptive."

In the near future, the revised standard will be applied to several matters in which McDonald's USA LLC – the franchisor of the McDonald's franchise system – is alleged to be a joint employer liable for unfair labour practices allegedly committed by individual franchisees. In December 2014 and February 2015 the NLRB's general counsel initiated several complaints against McDonald's USA and its franchisees alleging that certain McDonald's franchisees violated the rights of their employees by – among other things – making statements and taking actions against them for engaging in activities aimed at improving their wages and working conditions, including participating in nationwide fast-food worker protests during the past two years.

The NLRB's complaints against McDonald's USA provide almost no substantive guidance, as they simply note that McDonald's USA had a franchise agreement with each franchisee and declare (without elaboration) that McDonald's possessed or exercised control over each franchisee's labour policies. Elsewhere, the NLRB's general counsel has hinted that it was McDonald's USA's use of technology that allowed it to make real-time staffing recommendations to individual franchisees based on real-time restaurant revenue that captured the NLRB's attention. The general counsel's actions against McDonald's USA are currently pending before an administrative law judge.

Minimising liability

Under the NLRB's restated test, even franchisors with only indirect and limited control over a franchisee's workers could arguably be deemed a joint employer subject to collective bargaining and liable for the franchisee's labour practices. Further, the effects could go beyond labour issues, potentially affecting vicarious liability standards under general tort actions as well as state taxation of franchisors.

In light of the decision, a franchisor should take steps to minimise its risk of being declared a joint employer of franchisees' employees. These steps will also reduce the risk of a finding of common law vicarious liability for a franchisee's employment practices in most states.

Clear documentation disclaiming right to control franchisees' employees

Franchisors should review their franchise agreements and other documentation for evidence of actual or reserved control regarding a franchisee's employees. Franchise agreements and other documentation, including manuals and handbooks, should make clear that franchisees are solely responsible for all employment and personnel matters, including soliciting, hiring, firing, staffing, scheduling and managing their own employees. Franchisors should expressly disavow in writing any right to control employment and personnel matters and decisions. Language regarding a franchisee's employees (eg, hiring standards) should be phrased as recommendations instead of requirements.

Avoid actual control over franchisees' employees

Franchisors should, in practice, implement only those controls needed to protect the goodwill of the brand. Although the reach of Browning-Ferris will not be known for some time, franchisors should still be entitled to implement controls over trademark, advertising, quality control and unit appearance issues. On the other hand, franchisors should avoid actual control over personnel policies or actions, including the direct or indirect hiring, firing, disciplining and scheduling of franchisees' employees. Similarly, franchisors should be wary of technology that allows a franchisor to monitor and potentially intervene in employee-scheduling issues in real time.

Limit contact with franchisees' non-management employees

Franchisors should limit interactions with franchisees' non-management employees. When conducting inspections and site visits, the franchisor's personnel should review operations only with the franchisee's owner or manager. The franchisor's personnel should give directions or suggestions directly to the owner or manager and not to employees. Because indirect control may trigger joint employment status, any such directions or suggestions should focus on issues necessary to protect the goodwill of the brand, not the franchisee's employment or personnel matters.

Announce independent relationship

Franchisors should take steps to ensure that the franchisee's employees and the general public know that they are employed by the independent franchisee and not by the franchisor. For example, franchisors should require franchisees to place conspicuous signage stating that the unit is independently owned and operated. In addition, franchisors should prohibit franchisees from using the franchisor's name or marks in the franchisee's corporate name or in employment-related documents, such as applications, employment agreements or evaluations. If a franchisee imposes a personnel handbook on its employees, then the franchisor should request that the handbook expressly state that the worker is an employee of the franchisee – not the franchisor – and that the franchisor does not possess the right to control the employee's performance of duties, scheduling or other conditions of employment.

For further information on this topic please contact Jess A Dance at Perkins Coie LLP by telephone (+1 303 291 2300) or email (jdance@perkinscoie.com). The Perkins Coie LLP website can be accessed at www.perkinscoie.com.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.