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What does the Labor Board's franchisor liability decision mean?

The Labor Board’s ‘definitive’ ruling on franchisor liability remains a head-scratcher.
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If any upshot of the National Labor Relations Board’s recent bombshell ruling is a certainty at this point, it’s that lawyers are going to make a lot of money.

The Aug. 27 decision has sent shudders through the ranks of restaurant franchisors because it could—or could not—hold them responsible for the employment policies and practices of franchisees. The fearsome possibility is that they’ll be regarded, because of the ruling, as “joint employers,” or in effect, co-defendants if a franchisee’s employees brings an action against the company actually issuing their work schedules and paychecks. Suddenly, employees who allege being wronged on the job by a franchisee could seek financial redress from the deeper pockets of the franchisor.

The looming danger is that unions could seize an inappropriate action on the part of a franchisee as a rallying point to muster employee and public outrage against the franchisor, making their job of organizing a whole system much easier. Despite McDonald’s Corp.’s celebrated record on diversity, it could be sanctioned as a discriminatory organization if a few renegade franchisees took questionable actions. The situation would be rich fodder for a union’s assertions that employees throughout the chain need the protection of being organized. And if it held an election to unionize the franchisee, the franchisor would be dragged into the situation as the co-employer.

Next: Who is a 'joint employer'?

Who is a ‘joint employer’?

McDonald’s already had been defined by the NLRB as a joint employer before the regulator handed down the August decision. Less certain is which other franchisors might be slapped with the label.

Steve Romaniello, managing director of the multiconcept restaurant franchisor Roark Capital Group, notes that franchisors were not held to be joint employers in two other recent actions before the NLRB. “There are a lot of questions and uncertainty at this point because the designation is fact-specific,” he says.

The definition has to be inferred from specifics of the August case, which did not involve a franchisor or franchisee at all. The case, which was brought by a union, centered on relations between Browning-Ferris Industries, a waste-management company, and Leadpoint, a temp agency that provided employees to BFI on a contractual basis.

The central legal question was what kind of control BFI could exert on Leadpoint’s employees, even if it never exercised the options to hire, fire, set wages, assign hours and so on. Even if BFI never exercised any of an employer’s prerogatives, could it? If the company had so much as “indirect control,” said the NLRB, it should be regarded as a joint employer.

Less straightforward were what the NLRB cited as possible indications of indirect control. BFI’s contract with Leadpoint requires, in essence, that the employees be capable of doing the work. Is that a form of control? A BFI supervisor once complained to Leadpoint that two of its employees were visibly drinking on the job. Is that an influence, since action was taken? The Leadpoint employees are required by the contract to clean up their work areas. Are those orders? And how about the safety standards BFI sets and underscores with training for the temps? The NLRB’s answer, as presented in its decision: Probably, at least in Browning-Ferris’ instance. And maybe in others.

“They used very broad language,” observes Maury Baskin, a partner in the Washington, D.C., law firm Littler Mendelson, one of the industry’s leading employment-law practices. “Things will have to be decided case by case, and that means there’s tremendous uncertainty.”

Next: What's a franchisor to do?

What’s a franchisor to do?

Franchisors really have two defensive options until some of the vague implications are clarified, Baskin says. “It makes sense for a franchisor to look at Browning-Ferris and not do those things that it did,” he explains. Could any of its interactions be construed as influencing an employee’s job? Franchisors probably are in the midst of that exercise right now, he said during a September interview.

The next step is taking a hard look at the standard franchise contract, an editor’s blue pencil in hand. “There are a number of things Browning-Ferris did that a franchisor could remove from their agreements and standards,” says Baskin.

But, he is quick to add, “in some cases it poses an insoluble dilemma for the franchisor.” The stipulations are there for reasons of protecting the brand and the business model, and are core underpinnings of the franchisee-franchisor relationship.

Franchisors have been known to press for the dismissal of a franchisee’s employee whose behavior is damaging to the brand.

Do franchisors really want to relinquish that bit of business common sense?

Next: What happens next?

Previous: 'Who is a joint employer?'

What happens next?

Eventually, says Baskin, the NLRB’s now-vague redefinition of “joint employer” either will be reversed or clarified through litigation. “It’s quite a challenge, and it’s going to play out over a few years,” he says.

Still, the redefinition “is not a done deal,” says Angelo Amador, senior vice president of labor and workforce policy for the National Restaurant Association. Rolling back the standard to what stood for 30 years could be done either through legislation or legal challenges.

A legislative remedy appears unlikely, even though bipartisan legislation to protect franchisors already has been introduced. President Obama, who remade the NLRB with his appointments, would almost certainly veto such a reversal, and there aren’t enough votes in Congress for an override. A change in control of the White House or Congress could ease a legislative remedy, but that could not come until 2017.

The most likely possibility, observers agree, is that the new definition will be challenged in court. “The main problem with this is the courts take time,” says Amador.

He expects little to happen for at least a year, when the issue will get to a federal appeals court. And that’s just the start. Afterward, “we’ll win some and lose some” until the matter likely wends its way to the U.S. Supreme Court, he says. Until the measure actually is overturned, “the NLRB regards it as a done deal,” and will act accordingly, he notes.

Baskin advises a franchisor to protect itself through the courts. “We recommend that people push back against the standard if it’s used against them,” he says.

In the meantime, smarts are seen as a good defense. “Right now we are just trying to be as aware and in the loop as we can,” says Romaniello, whose company owns the franchise rights to more than a dozen restaurant concepts, including Carl’s Jr., Hardee’s and Moe’s Southwest Grill. “There’s enough known for us to be uncomfortable but not enough information to be really worried.”

Previous: What's a franchisor to do?

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