The National Labor Relations Board has targeted major franchise brands as joint employers. This effort is designed to assist employees deemed at the bottom of the pay scale, deemed "vulnerable." Targeting McDonald's Corp. as a joint employer with its franchisees is motivated by an articulated policy to facilitate effective bargaining over wages and working conditions. (See "NLRB Office of the General Counsel Issues Consolidated Complaints Against McDonald's Franchisees and Their Franchisor McDonald's USA LLC as Joint Employers," published by the NLRB on Dec. 19, 2014.)

Contrast this with the U.S. District Court for the Northern District of California's recent decision in Ochoa v. McDonald's, 2015 U.S. Dist. LEXIS 129539 (September 25, 2015), which holds that under California employment law, the franchisor is not a joint employer. Why are the state and federal paths diverging? It seems that the definition of employer under state law is becoming more restrictive but the definition under federal statutes has become more flexible. The reason is a federal political agenda to empower the National Labor Relations Act to encourage collective bargaining of employees of franchises.

On July 29, 2014, the general counsel of the NLRB announced that a number of protests by employees of McDonald's franchisees would result in NLRB action against the franchisor on a consolidated basis. The NLRB named McDonald's USA LLC as a joint employer in complaints concerning discriminatory discipline, reduction in hours, discharges, and coercive conduct in response to union and protected concerted activity.

The NLRB's position is that joint employer status is based on McDonald's control over the franchisees' labor relations policy. The NLRB argues that the McDonald's system, without articulating the elements of joint employment, is a system in which the franchisor exerts sufficient control, directly or indirectly, to be held a joint employer.

In Browning-Ferris Industries of California d/b/a BFI Newby Island Recyclery, 362 NLRB 186, Case 32-RC-109684 (August 27, 2015), a new standard was announced that held even indirect or potential control over working conditions could be sufficient to find joint employment. The case held that it was possible for leased employees to be jointly employed, but notably, the decision did not mention franchising. The amicus brief filed by the general counsel of the NLRB, however, did specifically mention franchising. The argument was that a new standard needs to be imposed on franchisors in order to bring them to the collective bargaining table.

The general counsel urged a return to the broader standard to reflect problems related to the inability of employees to engage in collective bargaining. A return to a broader standard would entail a three-element test of a joint employer relationship: (1) indirect control over certain terms and conditions of employment; (2) unexercised but potential control would be sufficient; and (3) the potential to control could be based on economic realities rather than specific contractual obligations.

The amicus brief asserts that franchisors in some cases exert significant control over the day-to-day operations of their franchisees and effectively control wages paid to the employees of the franchisees by controlling all other variables of employment. The franchisor's ability to electronically monitor sales, suggest work schedules, control inventory, assist customer order fulfillment and similar matters through software reporting programs asserts further controls over the employment relationship.

The brief argues franchisors consider the avoidance of unionization and collective bargaining to be one of the advantages of the franchise model. The general counsel recommended a totality of the circumstances test to determine whether the franchise structure contains sufficient controls over the working conditions such that meaningful bargaining could not occur without including the franchisor as a joint employer.

Rather than having a bright-line test, the general counsel argues for a fact-sensitive, totality of the circumstances test that ignores substituting the contractual obligation for the economic realities of the relationship, and its impact on labor. The consolidated cases continue to be filed and discovery is continuing.

The McDonald's franchise agreement requires franchisees to comply with the franchisor's standards and policies regarding product offerings, equipment, trade dress, quality, service and cleanliness, much like most franchises. Franchisees are required to comply with the standards contained in the operations manual detailing operational, business and advertising policies.

The operations manual does not address hiring and firing of employees of franchisees, and the McDonald's franchise agreement does not address hiring, firing and control of the franchisees' employees. The franchisor does provide training to its franchisees and their managers.

Given the power of the McDonald's brand, and the controls McDonald's imposes on its franchisees over its brand, the NLRB will argue that McDonald's has as a matter of fact an indirect control over employment similar to Browning-Ferris. The courts, however, will be required to reconcile the holding in Nutritionality d/b/a Freshii, Cases 13-CA-134294, et al. (April 28, 2015), to establish a workable rule to apply to determine if franchisors are "joint employers" under the NLRA.

On April 28, the general counsel issued an advice memorandum regarding the fast food franchise system, Freshii. The memorandum determined that the Freshii franchise system did not create a joint employer relationship between the franchisor and franchisee under the standard or the standard proposed by the general counsel in the Browning-Ferris amicus brief.

Apparently, the decisive facts for the memorandum with respect to Freshii were (1) the absence of personnel policies or procedures; (2) disclaimers in the franchise agreement that Freshii did not control any labor or employment matters for franchisees and their employees; (3) the operations manual advice on human resource matters was not binding on franchisees; (4) the franchisees are solely responsible for hiring, discipline and termination of their employees; and (6) franchisees are solely responsible for setting employee salary and benefits. The General Counsel's Office summarized that "Freshii does not significantly influence the working conditions of [the franchisee's] employees," and therefore there is no joint employment relationship using the Browning-Ferris "economic realities" standard.

First published in The Legal Intelligencer.