On December 14, the National Labor Relations Board overruled its controversial decision in Browning-Ferris Industries of California, Inc., 362 NLRB No. 186 (2015). The ruling, Hy-Brand Industrial Contractors, Ltd., 365 NLRB No. 156 (2017), restores the NLRB’s traditional standard for determining whether two separate and independent businesses are “joint-employers” of the same employees. For franchisors, this means that there is less likelihood that the NLRB will deem a franchisor a joint employer of its franchisees’ employees simply because the franchisor enforces system-wide brand standards or has incidental contact with its franchisees’ workforce.

Hy-Brand provides significant relief to all those concerned about the recent expansion of the joint-employer doctrine, including franchisors and franchisees. Nevertheless, the fact that the NLRB reversed course so quickly after its 2015 ruling confirms this is a volatile issue. Far from resolving the matter, the NLRB’s actions over the past few years highlight the advantages of federal legislation that clarifies the standard for finding joint-employer liability in a way that recognizes the franchise model.

Round 1: Browning-Ferris

In August 2015, the NLRB upended over 30 years of precedent to “restate” the joint-employer standard under the National Labor Relations Act, the federal law that encourages collective bargaining and regulates certain labor practices. Since a pair of decisions in 1984, the NLRB had focused on whether a putative joint employer actually exercised “direct and immediate control” over the essential terms and conditions of the relevant worker’s employment, such as hiring, firing, discipline, supervision and direction. Although a fact-specific inquiry, this standard was widely seen as creating a fairly predictable legal regime for most businesses, including those in the franchise industry. Absent extraordinary circumstances, a franchisor would rarely be found to be a joint employer with its franchisees under the pre-Browning-Ferris standard.

All that changed with Browning-Ferris. In a 3-2 ruling, the majority overturned earlier board decisions requiring “direct and immediate control,” finding indirect control through an intermediary or the reserved right to control, even if unexercised, may be sufficient to find a joint-employer relationship. This expansive standard lowered the bar for imposing joint-employer liability. Suddenly, a company could be drawn into a labor dispute involving employees over whom it lacked any direct and immediate control.

In the wake of Browning-Ferris and the NLRB’s ongoing efforts to declare McDonald’s USA to be a joint employer liable for its franchisees’ alleged labor violations, many franchise stakeholders worried that, by merely exercising control over brand standards and trademarks, franchisors could be subjected to joint-employer liability.

Round 2: Hy-Brand

In last week’s Hy-Brand ruling, a new 3-2 majority explicitly repudiated Browning-Ferris’ expansion of the joint-employer standard and restored the traditional standard. Among other criticisms, the majority argued the standard announced in Browning-Ferris was an “analytical grab bag” that was too “vague and ill-defined” to provide meaningful guidance to employees and employers. The board then announced its return to the prior test, which “provided certainty and predictability.” Once again, imposing joint-employer liability will require proof that the alleged joint employer actually “exercised joint control over essential employment terms (rather than merely having ‘reserved’ the right to exercise control).” Further, “the control must be ‘direct and immediate’ (rather than indirect), and joint-employer status will not result from control that is ‘limited and routine.’”

Although neither Browning-Ferris nor Hy-Brand were franchise cases, the Hy-Brand majority analyzed the effect of the Browning-Ferris standard on the franchising industry. Observing that Browning-Ferris was “almost certainly momentous and hugely disruptive” to franchise relationships, the Hy-Brand majority found that expansion of the joint-employer standard necessarily placed franchisors in a dilemma: franchisors could either police their trademarks and brand standards (as they are legally required to do) and risk joint-employer liability for such “indirect” or “reserved” control, or they could avoid such enforcement and risk losing their trademark rights altogether. As the Hy-Brand majority recognized, such an unworkable conflict was at odds with congressional intent and Supreme Court precedent.

The Benefits of Federal Legislation Remain

While franchisors and franchisees should welcome Hy-Brand, the decision does not end the threat of federal attempts to expand the joint-employer standard. The current board’s decision to overturn Browning-Ferris after just two years, without seeking public comment, resulted most directly from changes in the political make-up of the five-member board—a point emphasized by the two Hy-Brand dissenters, who had previously been in the Browning-Ferris majority. Just as changes to the board’s membership resulted in overturning Browning-Ferris, future board changes could lead to a return to Browning-Ferris. Moreover, this issue is not limited to the NLRB. Over the past few years, various courts have applied an expanded standard in analyzing joint-employer issues.

All of this highlights the benefits of broad-based federal legislation to clarify the joint-employer relationship. Introduced in the House of Representatives July 27, H.R. 3441—the Save Local Business Act—seeks to clarify who may be deemed a joint employer under the NLRA and the Fair Labor Standards Act. Under the proposed legislation, to be deemed a joint employer, a business must “directly, actually and immediately, and not in a limited and routine manner, exercise significant control over the essential terms and conditions of employment, such as hiring employees, discharging employees, determining individual employee rates of pay and benefits, day-to-day supervision of employees, assigning individual work schedules, positions and tasks, or administering employee discipline.” The bill passed in the House of Representatives in November and now awaits action in the Senate. Franchisors and franchisees alike should strongly support the pending Save Local Business Act.

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