New rule increases restaurant franchisors' chances of paying for franchisees' labor mistakes

As feared, the National Labor Relations Board has broadened the definition of "joint employer," rousing the industry to pledge new battles in Congress and the courts.
More franchisors will be liable for franchisees' labor lapses. | Photo: Shutterstock

Restaurant franchisors will face a greater risk of being sued or penalized for the employment lapses of their franchisees under a long-awaited redefinition of the licensee-licensor relationship by federal regulators, according to advocates for the foodservice industry.

Watchdog groups for the business expressed particular concern over a stipulation that franchisors will henceforth be regarded as joint employers of franchisees’ staffs if they so much as have the potential to influence the rank-and-file operators’ labor policies.

Nor does the franchisor need to deal directly with employees to be regarded as one of their bosses and hence culpable for any ill treatment by the franchisee actually cutting workers' paychecks. Under the updated definition of joint employer put forth Thursday by the National Labor Relations Board, a chain is responsible for franchisees’ actions if the brand merely issues directions governing the manner, means, and methods of the performance of duties.”  

Franchisors routinely recommend who should do what inside a franchisee’s restaurant, from how guests are greeted to who fills their water glasses or delivers meals to the table. Those operational processes and procedures are among the standard deliverables for franchisees.

“The rule upends employment policy, adopting a far-fetched definition of ‘employer’ based on ‘indirect or potential influence’ of an employee and then fails to define how ‘indirect control’ will count toward a joint employer relationship,” Sean Kennedy, EVP of public affairs for the National Restaurant Association, said in a statement.

The International Franchise Association (IFA) immediately called on Congress to scuttle the new definition of joint employer through legislation and its regulatory review powers. Otherwise, it warned, labor-related lawsuits filed against restaurants are likely to double, thereby prompting chains to be more conservative in their expansion and choice of franchisees.

A broad definition of joint employer like the one issued Thursday was in force from 2015 to 2017. During that stretch, franchise businesses spent $33 billion annually to deal with the lawsuits and penalties that resulted, according to the IFA. Lawsuits alone increased by 93%, the association says. It pegged the job loss at 376,000, though advocates of a broad definition have blasted those figures as grossly inflated.

“Nearly a third of franchise owners say they would not own their own business without franchising, and this attack on the franchise model would shut the door of opportunity to thousands of would-be entrepreneurs,” Michael Layman, the IFA’s SVP for government affairs and public policy, said in a statement.

The joint employer standard issued Thursday marks at least the fourth time the legal concept has been defined since 2015. It replaces a far more limited definition that was set during the Trump Administration.

Under that pronouncement, franchisors and franchisees were regarded as joint employers only if the former took such direct actions as setting the hours, wages or employment tenures of franchisees’ employees. Those guidelines were struck down because of concerns about the process leading to their release by the NLRB.

Under the new definition, which was designated by the Board as final, franchisors and franchisees are regarded as joint employers if each has “an employment relationship with the employees” and “share or codetermine one or more of the employees’ essential concerns or conditions of employment,” according to the NLRB.

It lists seven of those “essential concerns or conditions.” Franchisors become a joint employer if they have the potential to influence any of the activities:

  • Setting wages, benefits or other compensation elements.
  • Scheduling and hours worked.
  • The assignment of duties.
  • Supervision of those duties being fulfilled.
  • Defining job responsibilities and how they’re fulfilled, as well as disciplinary practices.
  • Hiring and firing.
  • Conditions of the workplace.

 “The Board’s new joint-employer standard reflects both a legally correct return to common-law principles and a practical approach to ensuring that the entities effectively exercising control over workers’ critical terms of employment respect their bargaining obligations under the NLRA,” said NLRB Chairman Lauren McFerran. “While the final rule establishes a uniform joint-employer standard, the Board will still conduct a fact-specific analysis on a case-by-case basis to determine whether two or more employers meet the standard.”  

She was referring to the National Labor Relations Act, the landmark legislation that is the basis for the federal regulations governing union organizing and the rights of workers. Unions have been pushing for decades to broaden the definition of joint employer in hopes of easing their efforts to organize whole chains at once, instead of proceeding franchisee by franchisee. That task might be easier if franchisor and franchisee are viewed as the same entity by employees. 

The NRA said it is “considering all options available to restore a workable standard, including litigation.”

Similarly, IFA will use every avenue available to protect franchising from the harm this rule will bring,” said Layman, its chief lobbyist.

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