If you’ve ever been involved with franchising, then you know firsthand that the regulatory landscape for franchise companies can be daunting—particularly for those who aren’t familiar with the nuances of state and federal franchise laws. Navigating this already-challenging geography became even more complicated for franchisors recently when the National Labor Relations Board (“NLRB”) adopted a new “joint employer” test, deciding that McDonald’s Corporation should be considered the joint employer of its franchisees’ employees.
In December 2014, the NLRB—the agency tasked with protecting employees against unfair labor practices—identified McDonald’s (the franchisor) as a joint employer by alleging that it engaged in various unlawful employment practices against its franchisees’ employees. The NLRB argued that McDonald’s was a co-employer because of the indirect influence it had on those employees by way of the policies, procedures and rules McDonald’s requires all of its franchisees to follow. Many have speculated that this move is a political one stemming from the NLRB’s motivation to allow employees of these large franchise systems to unionize so that they can collectively bargain with their employers.
This move caught the franchise community off guard. Historically, franchisors have been found time and again to be shielded from such liability because they lack direct control over their franchisees’ employees. Now however, with this change in position and focus by the NLRB and other governmental agencies, many franchise companies are reconsidering the aspects of the franchisor-franchisee relationship and are seeking ways to limit their risks of being found jointly responsible as an employer of their franchisees’ employees.
This sea change has created a series of new challenges for lawyers who advise franchise brands. On the one hand, a franchisor’s primary responsibility is to protect the brand and integrity of the franchise system as a whole. As a result, it is critical for the franchise company to have strong rules and policies in place so it is able to ensure that customers have a uniformly great experience across all locations. On the other hand, the position taken by the NLRB and other governmental agencies has made it clear that greater control by a brand owner can be a contributing factor in the joint employer test.
What follows from this tension is the need to balance the quality and nature of controls exerted by franchise companies over their individual franchisees. For a trademark owner, it is critically important to protect the use of the brand and quality of the products and services to the end user. When these controls start to seep into matters of the employment relationship, the franchisor finds itself deeper within joint employer territory. As a result, experienced franchise attorneys typically seek ways to achieve that happy medium between dictating rules that ensure brand consistency and quality system-wide while at the same time avoiding a direct or indirect nexus to the relationship between the franchisees and their employees.
Without much in the way of direct guidance from the NLRB or other authorities, finding the right balance between these concerns can be elusive. The prevailing wisdom is that a franchisor should seek in its legal documents to tie its operational rules to brand-protection justifications, and leave it to individual franchisees to determine the way to direct their employees to follow those rules. By way of example, franchisors likely won’t find themselves to be joint employers if their manual dictates what type and style of uniforms the employees must wear. They may, on the other hand, find themselves deeper in joint employer territory if the manual dictates employees’ hours, pay and benefits.
The devil is in the details, and unfortunately there is no silver bullet to protect against these risks. Franchise companies concerned should consult with legal counsel experienced in franchising to best arm themselves in this increasingly perilous environment. iBi
Matthew J. Kreutzer and Brandon M. Garrett are attorneys with Howard & Howard. For more information, visit howardandhoward.com.