Joint-employer controversy put to an end by the NLRB

Restaurant franchisors’ fears of being held accountable for the employment practices of franchisees were laid to rest today by the National Labor Relations Board’s decision to rescind a controversial redefinition of “joint employer.”

The 3-2 vote in effect deflects efforts to sue the deeper-pocketed franchisor when a franchisee violates labor regulations. The Board stated in its decision today that the franchisor would be regarded as a joint employer, and hence as liable as a franchisee in a labor-related legal disputes, only if the brand owner exercised direct control over a licensee’s employees.

What’s more, that power has to be exercised directly and immediately, in a manner that is not routine. The definition is clearly much narrower, with a higher bar for when the joint employer standard can be applied.

An earlier incarnation of the board had ruled in 2015 that indirect, implied control, such as providing training programs or broad policies, was sufficient to have a franchisor declared a joint employer.

That ruling drew predictions that franchising would be fundamentally and mortally damaged. Restaurant chains feared they’d be routinely dragged into court for alleged labor violations on the part of franchisees, and suggested they would have to reconsider the feasibility of franchising as a growth strategy.

Franchisees, meanwhile, feared that franchisors would shield themselves from litigation by taking a heavier hand in setting field-level recruitment and employment practices. Having the flexibility to tailor labor decisions to the peculiarities of a market has been a hallmark of the franchising model.

They also worried that franchisors would develop more markets themselves instead of licensing the territories.

“Today's decision helps create certainty for franchisors and franchisees in the near term and highlights the need for long-term certainty in this area,” Matt Haller, SVP of government relations and public affairs for the International Franchise Association, said in a statement. The IFA had led the lobbying for a reversal of the earlier decision.

“Today’s decision restores years of established law and brings back clarity for restaurants and small businesses across the country,” said Cicely Simpson, EVP of public affairs for the National Restaurant Association. “We applaud today’s decision.”

The decision overturned a ruling in a landmark case where Browning-Ferris Industries, a waste management company, had been held accountable as a joint employer of an outside contractor’s staff.

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