The National Labor Relations Board announced a final labor rule Thursday for determining joint employer status, broadening the definition and increasing the likelihood of franchisors being held liable with their franchisees for labor law violations.
Under the new standard, a franchisor doesn’t need to deal directly with a franchisee’s employees but is responsible for franchisees’ actions if the brand issues “directions governing the manner, means, and methods of the performance of duties.” Such involvement is inherent in the franchise model, as franchisors commonly recommend how certain job functions are executed.
With the new rule, which takes effect December 26, companies designated as joint employers will share liability and will have a legal obligation to negotiate with unions.
The board’s action comes just over a year after notice of the proposed new rule was published in September 2020. During the comment period that followed, the board received more than 13,000 comments.
Condemnation to the new rule was swift from restaurant and franchise representatives. Sean Kennedy, executive vice president of public affairs for the National Restaurant Association, called the action “a heavy blow to small business restaurant operators.”
National Restaurant Association Executive Vice President of Public Affairs Sean Kennedy
“Nearly one-third of the restaurant industry operates under a franchisee-franchisor relationship and nearly all restaurants contract third parties for work like laundry or delivery,” Kennedy said in a statement. “This means nearly every restaurant operator is now on a crash course to figuring out if they have a joint liability for the host of people working in their establishments. And franchisees are suddenly having to come to terms with losing their independence in the eyes of the NLRB.”
Michael Layman, vice president of government relations and public affairs for the International Franchise Association, also weighed in.
“This overreaching and unworkable joint employment policy is designed to change the rules in the middle of the game for hundreds of thousands of franchise owners and turn them into middle managers in their own business,” Layman said in a statement. “What’s worse, we have seen this misguided policy before and it resulted in hundreds of thousands in lost job opportunities, billions in increased costs for franchised businesses and a doubling of lawsuits.”
Layman was referencing the previous rule, in place during the Obama Administration. According to the IFA, the rule cost franchise businesses $33 billion per year in operational costs and led to a 93 percent increase in lawsuits.
The latest standard rescinds the 2020 rule in place during the Trump Administration, which had been opposed by the Service Employees International Union. In 2021, the SEIU filed a lawsuit against the board’s decision, arguing that the 2020 rule violated federal labor law by limiting the factors the board can consider in determining whether a company can be held jointly liable for violations.
In a press release, NLRB Chair Lauren McFerran said, “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 National Labor Relations Act.
“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 said.
Under the definition, franchisors and franchisees may be considered joint employers if each has “an employment relationship with the employees” and they “share or codetermine one or more of the employees’ essential concerns or conditions of employment.” The NLRB lists seven “essential terms and conditions:”
• Setting of wages, benefits and other compensation
• Hours of work and scheduling
• Assignment of duties
• Supervision of the performance of duties
• Defining job responsibilities and how they’re performed, along with disciplinary practices
• Tenure of employment, including hiring and firing
• Working conditions related to the safety and health of employees
McFerran was joined in the ruling by board members David Prouty and Gwynne Wilcox, who both joined the NLRB in 2021. Dissenting on the rule was Marvin Kaplan, who began serving on the board in 2017 under the Trump administration and was reconfirmed by the Senate in 2020.
In his statement, Layman called on Congress to reject the rule through the Congressional Review Act. Following the new rule, U.S. Senators Dr. Bill Cassidy, R-LA, and Joe Manchin, D-WV, announced they would introduce a CRA resolution to overturn the NLRB’s action.
“Saddling franchisors with liability for thousands of franchise owners that actually operate the day-to-day activities of small business would be a sure way to destroy the system of franchising,” Cassidy said in a release. “This model has empowered those underrepresented in the business community, such as women and people of color, to live the American dream, becoming successful small business owners as they help create jobs lifting other workers out of poverty.”
U.S. Sen. Joe Manchin, D-WV
“Ultimately, with this new final rule, the board has decided to harm thousands of small businesses, their employees and the surrounding communities,” said Manchin. “Instead of wreaking havoc on the franchise business model, we must enact commonsense, bipartisan policies that empower small businesses to do what they do best: create jobs, present new opportunities for workers and their families, and help our economy thrive.”
The IFA, said Layman, “will use every avenue available to protect franchising from the harm this rule will bring.”