Introduction

Since the Office of the General Counsel of the National Labour Relations Board (NLRB) began efforts in 2014 to characterise McDonald's USA, LLC and its franchisees as "joint employers", the franchise industry has been awaiting clarification on how much assistance and guidance a franchisor can provide to its franchisees without being subject to joint employer liability.

Unfortunately, the NLRB's complaints against McDonald's provide little detail on the basis for claiming that the franchisor is a joint employer. Rather, the complaints merely recognise that McDonald's had a franchise agreement with each franchisee, and then broadly declare, without elaboration, that McDonald's possessed or exercised control over each franchisee's labour policies. The NLRB's general counsel has hinted in public comments that what may have initially drawn the NLRB's ire was McDonald's use of technology to make real-time staffing recommendations to individual franchisees based on real-time restaurant revenue. Given the alarm created by the NLRB's pending McDonald's actions, the NLRB's recent advice memorandum regarding the Freshii franchise system provides helpful but not determinative guidance.(1)

Freshii advice memorandum

After finding merit in unfair labour practice allegations against a Freshii restaurant franchisee, a NLRB regional office sought advice from the NLRB's general counsel about whether the franchisor was a joint employer with the franchisee under either the existing legal test or a new standard proposed by the general counsel. Since at least 1984 the NLRB has examined a franchisor's actual practices to determine whether the franchisor exercises significant, direct and immediate control over the essential terms and conditions of employment, such as the supervision, discipline, scheduling, hiring and firing of the franchisee's employees.

In Summer 2014 in the pending case of Browning-Ferris Industries of California, Inc,(2) the NLRB's general counsel proposed a new test that asks whether a putative joint employer "wields sufficient influence" over working conditions based on "the totality of the circumstances". This proposed new standard focuses not only on the immediate and actual impact of a franchisor's actions on a franchisee's employees, but also on the potential or hypothetical authority, even if not exercised, that a franchisor could use to control franchisee employees.

In the Freshii advice memorandum the NLRB's general counsel concluded that Freshii was not a joint employer with its franchisee under either the existing standard or the new test proposed in Browning-Ferris. The majority of the memorandum's analysis focused on the existing standard. Finding that Freshii was not a joint employer under the existing standard, the general counsel noted the following factors:

  • Freshii had no role in hiring, firing, disciplining or supervising the franchisee's employees. While prospective restaurant employees could submit applications online, Freshii simply forwarded applications to the local franchisee without any screening.
  • Only the franchisee was responsible for determining its employees' wages, raises and benefits. Franchisees could change wages without consulting Freshii.
  • Freshii had no involvement in scheduling and setting work hours through use of software and application of algorithms or otherwise.
  • While Freshii's operations manual and sample handbook contained hiring, scheduling and disciplinary suggestions, franchisees were not required to follow Freshii's recommendations and many did not.
  • Freshii's control was limited to ensuring a standardised product and customer experience, which did not evince determination of essential conditions of employment. Franchisor requirements on restaurant design, decoration, décor, uniforms, initial training and store hours, without more, are not a basis for finding joint employment.
  • Monthly reviews of franchised restaurants were focused on operational issues and brand standards, not on a franchisee's hiring, discipline, scheduling or wage policies.
  • Freshii did not meaningfully affect the terms and conditions of the franchisee's employees through its contractual right to terminate the franchise agreement. No franchisee had been terminated for non-brand related reasons.
  • Freshii did not interfere with or instruct the franchisee regarding attempts at union organisation by the franchisee's employees.

After an in-depth analysis of Freshii under the existing joint employer standard, the memorandum devoted only two short paragraphs to the new standard proposed in Brown-Ferris. The general counsel concluded that Freshii did not significantly influence the working conditions of the franchisee's employees as it had no involvement in hiring, firing, discipline, supervision or setting wages. Therefore, Freshii was not a joint employer, even under the proposed new standard.

Minimising potential joint employment liability

Given the similarities between Freshii and many franchise systems, the general counsel's recent advice memorandum provides some reassurance to franchisors. However, the memorandum's fact-specific analysis provides no bright-line rules for franchisors. Moreover, the general counsel's pending efforts to impose a new joint employer test in Browning-Ferris and to declare McDonald's a joint employer still have the potential to radically change the law.

Although the results of Browning-Ferris and McDonald's will not be known for some time, the Freshii advice memorandum underscores the steps that a franchisor can take to minimise its risk of being declared a joint employer of its 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:

  • Provide clear documentation – franchisors should make clear in their franchise agreements and other documentation, including manuals and handbooks, that franchisees are solely responsible for all employment and personnel matters, including soliciting, hiring, firing, scheduling and managing their own employees. Franchisors should expressly disavow control over employment and personnel matters and decisions.
  • Avoid control over franchisee's employees – franchisors should, in practice, implement only those controls necessary to protect the goodwill of the brand. While franchisors can – and should – implement controls over trademark, advertising, quality control and unit appearance issues, franchisors should avoid control over personnel policies or actions, including the hiring, firing, disciplining and scheduling of the franchisee's employees. Similarly, franchisors should be wary of technology that allows a franchisor to monitor and potentially intervene in employee scheduling issues in real time.
  • Announce independent relationship – franchisors should take steps to ensure that the franchisee's employees and 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 (eg, applications, employment agreements and evaluations). If a franchisee imposes a personnel handbook on its employees, the franchisor should request that the handbook expressly states that the worker is an employee of the franchisee – not the franchisor – and that the franchisor does not exercise control over the employee's performance of duties, scheduling or other conditions of employment.
  • Limit contact with franchisee's non-management employees – franchisors should limit interactions with a franchisee's non-management employees. When conducting inspections and site visits, the franchisor's personnel should review operations only with the franchisee or its manager. The franchisor's personnel should give directions or suggestions directly to the franchisee's owner or manager and not to its employees.

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

Endnotes

(1) Advice Memorandum regarding Nutritionality, Inc, d/b/a Freshii from Barry J Kearney, Associate General Counsel, NLRB Office of the General Counsel, to Peter Sung Ohn, Regional Director, NLRB Region 13 (April 28 2015), available at www.nlrb.gov/case/13-CA-134294.

(2) NLRB Case No 32-RC-109684.

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