Federal judge strikes down new joint employer rules

One business day before the new standard was to be adopted, a federal judge sided with the franchise industry and blocked adoption, saying the update goes too far.
The new definition is too broad, according to Judge Barker. | Photo: Shutterstock

A federal judge has blocked federal regulators from significantly increasing the instances where restaurant franchisors could be sued or sanctioned because of their franchisees’ labor practices, a change blasted by chains as potentially a reason for them to stop franchising.

U.S. District Judge J. Campbell Barker struck down the new criteria for adjudging when franchisor and franchisee are joint employers on Friday, the last business day before the new definition was set to take effect.

The ruling came in a lawsuit that was filed months ago by a coalition of business groups, including the Texas Restaurant Association, the International Franchise Association, the U.S. Chamber of Commerce and the Restaurant Law Center, the legal arm of the National Restaurant Association.

Barker agreed with the plaintiff’s contention that the National Labor Relations Board, the federal agency that monitors union organizing, had set too broad of a standard in redefining when franchisor and franchisee can be regarded as joint employers. Under the new guidelines issued by the NLRB in October, a franchisor could qualify as a joint employer if it so much as had the potential to influence the way franchisees managed their employees, regardless of whether or not that power was exercised.

Such routine acts as suggesting how large a staff to raise or what jobs should be established could have been enough to cast the franchisor as its franchisees’ joint employer.

Barker also agreed with the plaintiffs' assertions that the NLRB had forged ahead with its redefinition without heeding the public’s input during the commentary period of the rule-making process. When a regulation change is proposed by a federal agency, the public is provided an opportunity to shape the new rules by submitting comments to the regulators. The suit alleges that the input was virtually ignored by the NLRB.

The Board has been pushing for a broader joint-employer definition for more than eight years because the standard can greatly influence union organizing. To organize a typical franchised restaurant chain, a union has to win representation franchisee by franchisee. If the franchisor and franchisee are joint employers, organizing a licensee means the chain owner, its employment partner, will also be obligated to engage in collective bargaining.

Because of Barker’s ruling, the NLRB will be forced to continue using the joint-employer definition that was set by the Trump administration. That standard classifies a franchisor as the co-employer of a franchisee’s staff only if the brand parent exercises direct influence on the licensee’s employees, such as setting their pay, drafting their schedules and hiring or firing.  

However, the NLRB is widely expected to appeal Barker’s ruling on behalf of the U.S. District Court for the Eastern Texas District.

For that reason, opponents of the redefinition have indicated that they will persist in their efforts to have Congress kill the update. The International Franchise Association has been leading a lobbying campaign aimed at vacating the NLRB’s measure through a seldom-used Congressional power to veto new federal regulations. The House of Representatives has already voted to invoke the Congressional Review Act and erase the new definition.

“Today’s court ruling is a landmark win for franchising. The ruling preserves the franchise business model – the best vehicle for small business formation on Main Street -- by rejecting a flawed regulation enacted solely for the benefit of advancing the political goals of organized labor,” Matt Haller, CEO of the International Franchise Association, said in a statement. “Elected officials on both sides of the aisle talk a big game about standing up for small businesses, and now the U.S. Senate can act on those promises by putting the bipartisan CRA resolution on President Biden’s desk.”

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