Sep 18, 2015 - Franchise Articles by |

The Unintended Consequences to Franchising of the NLRB’s New Joint Employer Test

Like all other government regulation, the new NLRB joint employer test has unavoidable unintended consequences. The Browning-Ferris joint-employer decision will likely send many franchisors back to the drawing board to find aspects of their systems about which they can relinquish legal and operational control and responsibility to their franchisees. Unfortunately, the increased costs that the new standard will impose on franchisors will be passed along, in large measure, to franchisees, some of which will be unable to maintain a profitable business. Of these, some will simply shut their doors, and others will be terminated.

Last week, the National Labor Relations Board (NLRB) decided the Browning-Ferris decision, one that was long-awaited by the franchise industry. Although the case did not directly involve franchise industry parties, the decision did establish a new standard for determining whether an entity is an employer subject to the statutory obligation to engage in good faith collective bargaining with workers. Under the new standard, franchisors can be found to be employers, along with their franchisees, of their franchisees’ workers.

The NLRB, in jettisoning the established test of “direct control” (e.g., hands-on efforts regarding hiring and firing), embraced a far more expansive test of “indirect control.” In so doing, the NLRB has exposed franchisors, which, although not the actual employers of their franchisees’ workers, nevertheless exert indirect control of their franchisees’ workers.

As the dissent in the Browning-Ferris decision pointed out, for many years the NLRB did not hold franchisors to be joint employers under the Act, regardless of the test utilized by the Board. In these cases the Board refused to accept detailed system policy manuals as proof of control. According to the dissent, the majority’s sudden and abrupt change in course would lead to disastrous economic consequences. “The majority does not mention, much less discuss, the potential impact of its new standard on franchising relations, but it will almost certainly be momentous and hugely disruptive.”

Further, the dissent was concerned that the new joint employer test, focusing on “the manner and method of performing the work” was predisposed to finding that franchisors are subject to the NLRA, since they naturally share and codetermine the nature and manner of work by franchisees’ employees. More specifically, the dissent was uneasy that the new test would incentivize franchisors to diminish efforts to police their tradenames and trademarks, a necessary prerequisite to maintaining protection for the marks under the federal Lanham Act. “In many if not most instances, franchisor operational control has nothing to do with labor policy but rather compliance with federal statutory requirements to maintain trademark protections.” 

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