INSIGHTS/

Franchisors as Joint Employers: Regulators Cast a Wide Workplace Net

Federal Overreach? The National Labor Relations Board (NLRB) has issued a new version of an old rule, defining franchisors as “joint employers” of their franchisees’ workers. The measure has ignited a battle in the courts and Congress — for good reason. My take on this: I think it’s nuts. It ignores the reality of the […]

April 5, 2024
Regulators Cast a Wide Workplace Net

Federal Overreach?

The National Labor Relations Board (NLRB) has issued a new version of an old rule, defining franchisors as “joint employers” of their franchisees’ workers. The measure has ignited a battle in the courts and Congress — for good reason.

My take on this: I think it’s nuts. It ignores the reality of the franchising system, which serves an important business purpose as an efficient finance model for expanding franchisors’ distribution networks.

Business groups are battling the measure, and a federal judge in Texas has blocked implementation. The new rule is likely to remain mired in litigation for some time.

Under the NLRB’s latest proposed rule, franchisors would be required to bargain with franchisees’ labor unions if they were classified as joint employers — that is, if the franchisor had any control over pay, scheduling, work rules, supervision, or other terms of employment. The measure defines “control” broadly, as either direct or indirect authority, whether or not the franchisor actually uses it.

My technical opinion on that language? It’s stupid. Either you’re a joint employer or you’re not. If the motivation was really to regulate joint employment situations, you would define it as actually exercising control. What the regulators are actually trying to do is to expand franchisors’ liability — to prevent them from avoiding it downstream. The fact that the NLRB feels a need to include that language underscores the reason it’s stupid.

Defining this franchise relationship can get weird in a hurry, though. As a franchisee, one thing I want the franchisor to do is figure certain things out for me. For example, if a franchisor comes up with scheduling software that integrates with my other technology, I don’t have to go out and find that product myself. I also want the franchisor to figure it out and show me how to install it and get it running. Once any vendor is chosen for a franchising system, they are expected to support the franchisees. It would be a shame if those setups were used as evidence of some sort of joint employment relationship.

My advice to clients, however, would be to draw a separation whenever possible. If I use a franchisor’s predictive software to model staffing needs, that could create the appearance of a joint employment relationship. There’s a fine line to be drawn here: Are you tapping into a database that is owned by the franchisor? Or is the franchisor providing it for use with your own separate account? The latter would be wiser, in my view.

Supporters of the pending rule argue that it would help workers. But would employees actually be better off under this measure? I don’t believe so. This rule is aiming to solve a problem that doesn’t exist. Based on what I see in my clients’ businesses, they hire and promote from within. People who show up and are ambitious, smart, and hard-working get promoted and move ahead, and that is a system that should remain untouched by regulatory overreach. Small businesses are the bedrock of our communities and our economy. To issue mandates that undermine them just doesn’t make sense.

The joint employer concept is not new. In fact, it is starting to resemble one of those pop-up clowns that won’t stay down. You think you’ve knocked it out, but the next time you turn around, it’s back. When the NLRB last tried this, in 2015, franchisors freaked out and changed their customary practice of setting rubrics, or sets of instructions for staffing, business hours, and so on. By that point, franchisees who were successful had already stopped using the rubrics because of the tensions inherent in the franchisor-franchisee relationship. Since then, franchisors themselves have seen that it was only a matter of time before some plaintiffs’ lawyers tried to use the rubrics as evidence of a joint employer relationship, and decided to stop using them too.

My preference was always that the rubrics be dropped. I represent franchisees, and I support their efforts to exercise discretion over their operations. I don’t believe my clients need to be told how to staff their restaurants.

Since then, the NLRB has flip-flopped on this issue two more times. After changing the standard in 2015 to broaden parent company liability, the agency reversed itself in 2020 under former President Trump, and reversed itself again this year. Each time Washington changes the rules, the industry spends a lot of time and money to provide comments or file lawsuits. The resulting lack of predictability is a hindrance to business.

As some anonymous writer once said, small business isn’t for the faint of heart. It’s for the brave, the patient, and the persistent. It’s for the overcomer. As the quote suggests, franchising is here to stay. The franchising model is often at the forefront of financial and organizational innovation in this country. Even if this rule eventually does take effect, franchisors and franchisees will find a way to deal with it.

West Coast Franchise Law

If you have any questions about franchising, please contact the experienced franchise and business law attorneys at West Coast Franchise Law today at (206) 903-0401 to discuss your situation. Nate Riordan is a 2023 Franchise and Bankruptcy Super Lawyer with over 20 years expertise helping clients achieve their business goals.