Seldom, if ever, has a brief press release posed an existential threat to a global business model. Just a dozen or so words, however, in a statement from the National Labor Relations Board have raised major concerns among companies that rely on franchising.

Traditionally, franchisees and franchisors have been recognized as independent of each other with standards and tests for confirming that independence crafted by the NLRB in 1984. The basic guideline: Companies have free reign to protect their brand and advise independent owners, but on labor-related matters, as long as they only suggest management practices and not mandate them, they maintain their independent status.

That could soon change. In a July statement, NLRB General Counsel Richard Griffin addressed labor complaints against fast food giant and franchise pioneer McDonald’s, opining that when labor disputes arise the company can no longer insulate itself from complaints by claiming the independence of franchise owners. The memo suggests that the purported firewall between corporate and local owners isn’t enough for the chain to avoid being considered a joint employer and McDonald’s can no longer take a hands-off approach to labor matters because it exerts too much control over locally owned restaurants.

If the push to scrap standards for what constitutes a joint-employer relationship comes to fruition, repercussions could hit any business that outsources labor, forcing companies to dramatically rethink how they protect their brand, address risk, and extend their corporate culture through training and compliance-driven oversight.

“Joint employment as a concept impacts employers of all shapes and sizes and in all industries,” Andrew Prescott, a partner with the law firm Nixon Peabody who specializes in labor and employment matters, says. “The bottom line is that all employers in close business relationships with other employers, even when they are legally distinct entities, have to keep an eye on this.”

The Memo

The backdrop to the McDonald’s memo, and the labor complaints it addresses, is an ongoing fight by unions to organize geographically disparate fast food employees. The controversial memo said the NLRB is working through 181 cases involving McDonald’s filed since November 2012.  Of those cases, 64 are currently pending investigation, 43 cases were already found to have merit, and 68 were found to have no merit and dismissed. For cases where a complaint has been authorized, McDonald’s franchisees or the franchisor will now be named as a respondent, and in some instances both may be named.

McDonald’s is vigorously challenging the push to define it as a joint employer along with franchisees, possessing more than passive influence over local operations. “We will contest this allegation in the appropriate forum. McDonald’s also believes that this decision changes the rules for thousands of small businesses, and goes against decades of established law regarding the franchise model in that U.S. McDonald’s does not direct or co-determine the hiring, termination, wages, hours, or any other essential terms and conditions of employment of our franchisees’ employees—which are the well-established criteria governing the definition of a joint employer,” Heather Smedstad, the company’s senior vice president for human resources, said in a statement.

Beyond McDonald’s

Another case currently under review by the NLRB—a review of Teamster collective bargaining concerns—offers more insight into the direction the agency is heading. A local union under the Teamsters umbrella, the Sanitary Truck Drivers and Helpers Local 350, is asking the board to rule that Browning-Ferris Industries and Leadpoint Business Services, a staffing service, are joint employers. The complaint tracks to ongoing efforts to unionize workers and force Browning-Ferris to take a seat at the negotiating table. The union’s argument is that BFI’s control over Leadpoint triggers joint employer status because it sets productivity demands and, for example, posts rules for employee breaks.

While the McDonald’s memo didn’t contain any indications of exactly what the NLRB might review or when, the BFI case offers a more detailed peek into its thinking. In May, it put out a call for interested parties to weigh in on the case through amicus briefs. The NLRB is asking:

Should the board adhere to its existing joint-employer standard or adopt a new standard? What considerations should influence the board’s decision in this regard?

If the board adopts a new standard for determining joint-employer status, what should that standard be? If it involves the application of a multifactor test, what factors should be examined? What should be the basis or rationale for such a standard?

“It calls into question a number of fairly widespread employment practices that before now were relatively well understood in terms of how to structure them so companies wouldn’t be a joint employer.”
Joel Buckberg, Shareholder, Baker Donelson

The NLRB already indicated its positions on such questions in a recent amicus brief.  “The board should abandon its existing joint-employer standard because it undermines the fundamental policy of the National Labor Relations Act to encourage stable and meaningful collective bargaining,” wrote Meghan Phillips, counsel to the general counsel at NLRB.

Taken together, the BFI and McDonald’s cases have many business owners on edge. “You would never think of holding General Motors liable for sexual harassment that happened at a Cadillac dealership, but nevertheless that is the logical implication of what the NLRB is doing,” Craig Tractenberg, a partner with the law firm Nixon Peabody and leader of its franchise and distribution team, said.

Non-franchised businesses that rely on outsourced staffing structures are also watching the NLRB’s decisions closely. The cases may affect “any business that uses temporary staffing, sub-contractors, or other employment arrangements where people who are engaged in activity at the line level are not necessarily controlled by the people who own the business,” says Joel Buckberg, a shareholder at law firm Baker Donelson. “It calls into question a number of fairly widespread employment practices that before now were relatively well understood in terms of how to structure them so companies wouldn’t be a joint employer.”

How Much Control?

New standards for joint-employer status are likely to pull more companies and models under their umbrella. “The test the NLRB may come out with is going to be broader and more amorphous,” say Theodore Pearce, a franchise specialist for the law firm Nexsen Pruet. “It is going to be harder to determine whether you are in compliance or not. It impacts the ability for franchisors to police their trademark.”

“If I mandate franchisees to use uniforms in the operation of their business, I am trying to maintain a certain amount of uniformity for the customer,” he adds. “But, of course, the NLRB is going to say that’s an employment practice and you are affecting the workplace environment. It becomes a very slippery slope.”

Company-wide IT systems may also engender scrutiny. There is speculation that an issue for the NLRB is McDonald’s networked software, intended to help franchisees track employees and adjust staffing levels. The distinction between monitoring, and exerting control over, worker hours is likely to be hotly debated.

“Because I’m monitoring my brand and sales, and doing all the things that a franchisee really wants a franchisor to do to add value to their business using technology, I am subject to criticism for providing too much help or support,” says Dean Fournaris, co-chair of the law firm Wiggin and Dana’s franchise and distribution practice group. “When I provide world-class service to my franchisees, am I going to be deemed to be too controlling and a joint employer?”

Compliance and Risk

Divergent paths may emerge for companies when it comes to risk mitigation, internal controls, training, and compliance. In one scenario, despite the imperative for brand protection, franchisors and companies that rely on outsourced labor could scale back these efforts to avoid the joint employer tag, or, burdened with the status, they may ramp them up.

“If I am a chief compliance officer for a major U.S. franchisor and I’m stuck with the obligation of stepping in when someone has a fry cook that has been harassing the hostess at the restaurant, or if I am going to have to be involved in specific training, then the business model as it is currently set up doesn’t work,” says Robert Cresanti, executive vice president of government relations and public policy for the International Franchise Association. “I am increasing the amount of services that have to be rendered, and increasing the risk exposure I have at the corporate headquarters.”

Experts agree that how the NLRB rules in the BFI or McDonald’s complaints won’t be the final word and the cases could be appealed all the way to the Supreme Court.

Abandon the Joint-Employer Standard?

The Following is from an amicus brief, produced by the office of the National Labor Relations Bureau, in response to a labor dispute involving Browning-Ferris Industries of California.
The board should abandon its existing joint-employer standard because it undermines the fundamental policy of the National Labor Relations Act to encourage stable and meaningful collective bargaining.
The board’s current standard is significantly narrower than the traditional standard, under which an entity could be a joint employer if it exercised direct or indirect control over working conditions, had the unexercised potential to control working conditions, or where “industrial realities” otherwise made it essential to meaningful bargaining. The current standard also ignores Congress’s intent that the term “employer” be construed broadly in light of economic realities and the Act’s underlying goals, and has particularly inhibited meaningful bargaining with respect to the contingent workforce and other nontraditional employment arrangements.
The general counsel urges the board to adopt a new standard that takes account of the totality of the circumstances, including how the putative joint employers structured their commercial dealings with each other. Under this test, if one of the entities wields sufficient influence over the working conditions of the other entity’s employees such that meaningful bargaining could not occur in its absence, joint-employer status would be established. In essence, this would mark a return to the board’s traditional approach… and would better effectuate the Act’s underlying purposes and policies.
Source: NLRB.

Nervous business owners recently received some good news by one court decision.  Earlier this month, The U.S. Court of Appeals for the Fifth Circuit overturned a lower court ruling in the case of Orozco v. Plackis. That ruling established that an employee of a local franchise of the Craig O’s pizza chain could not pursue a labor-related complaint against the parent company by claiming it was a joint employer. The court found that the company’s monitoring of wages and work schedules allowed it to offer advice, not to exert control over decisions made by the franchisee.

Also, last week, the California Supreme Court reversed an appeals-court decision that gave Domino's Pizza, as a corporate parent, culpability for sexual harassment engaged in by the supervisor of an independently-owned franchise. The ruling stresses that, although Domino’s monitors their brand and individual locations, it does not micro-manage them to a degree that defines it as a joint employer.

“Within the world of independent contractors there are a slew of other relationships,” says Fournaris. “You have a lot of different types of people who have been classified, traditionally, as independent contractors and who may no longer be.”

“If a rule is written for McDonalds, then all of a sudden you will see Joe’s Barbecue Stand, oil change businesses, home healthcare aides, and others subjected to those same rules,” says the IFA’s Cresanti. “It is potentially crippling. If this applies to McDonalds, then there is an issue for the rest of the industry.”