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Research puts a price on joint employer confusion: $33.3B annually

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The regulatory decision that made franchisors liable for the labor practices of franchisees has cost the typical franchise business $142,000 a year in legal fees and other expenses, according to new research on the effects of the ruling, a redefinition of the federal joint employer standard.

Since the legal concept was redefined by the National Labor Relations Board (NLRB) in August 2015, lawsuits that hinge on franchisors’ responsibility to franchisees’ employees have soared by 93%, the study found. It estimates that 336,000 jobs were lost in the process, and that franchisors have distanced themselves from franchisees to lessen the chances of being hauled into court by disgruntled employees looking for deeper pockets to sue.

The research was commissioned by the International Franchise Association (IFA), a trade group for franchisors and franchisees. The data was collected by a U.S. Chamber of Commerce economist, Ronald Bird, through interviews with 75 franchisees and franchisors.

The franchise community warned at the time of the 2015 NLRB decision that the franchising model would be permanently changed and irreparably harmed by the greater liability franchisors faced. The research supports that contention. Nine out of 10 franchise companies—franchisees and franchisors alike—have seen brand owners pull back on the support they offer the field-level small businesses that typically operate the units of a chain. 

The IFA stressed that the $33.3 billion spent annually by the franchise industry because of the joint employer standard went entirely toward lessening the chances of being sued, not to comply with the rule. “It reflects the loss of productivity that has resulted from the fear and uncertainty that has ensued from that decision,” the group said in releasing the data.

The findings were included in the comments filed by the IFA on plans by the NLRB to set a more realistic and precise definition of joint employer. A big part of the problem for franchisors and franchisees, the group maintains, is the room for interpretation of the term. Courts and the NLRB itself have repeatedly reinterpreted the standard. As recently as Dec. 28, the District Court of Appeals for Washington, D.C., blurred the issue by reaffirming the 2015 definition—and then specifying clarification was needed from the NLRB.

“If the second highest court in the land can’t interpret how the Obama NLRB intended for their convoluted joint employer standard to be applied, how is a small business owner supposed to figure it out?” Matt Haller, the IFA’s SVP of government affairs and public relations, said at the time.

The group and its lobbying allies would like to see a set definition narrow the liability of franchisors to situations where the licensors exercise direct control over franchisees’ employees, a situation seldom encountered in the restaurant industry. The District Court dissented from that definition, saying a franchisor is technically a joint employer if it has indirect control over licensees’ employees, even if that influence is never exercised.

The IFA and other groups have lobbied for setting a definition by law rather than leaving it to regulators and the interpretations of courts. They point out that the standard could be changed again if the Democrats win back the White House in 2020.

The franchising association isn’t the only group that filed comments to guide the NLRB in setting a fixed definition. “We fully support the proposed rule that would reinstate the ‘direct and immediate’ joint-employer standard,” the National Restaurant Association’s Restaurant Law Center said in filing its comments. “Recent court decisions have further muddied the waters and provide no clear test or guidance for employers, underscoring the need for a clear, bright-line rule as the Board is proposing.” 

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