A bill titled the “American Franchise Act” is currently pending before the U.S. House of Representatives. Introduced by a bipartisan group of legislators, the bill is intended “[t]o preserve the franchise business model” by codifying the joint employer standard established by the National Labor Relations Board (NLRB) in 2020. Learn more from national franchisee lawyer Jeffrey M. Goldstein:
American Franchise Act Seeks to Codify the Current Joint Employer Standard
The joint employer standard has been a major topic of discussion in franchising for the past decade. While the NLRB had long taken the position that a franchisor must assert “direct and immediate control” over an employee’s terms and conditions of employment in order to be considered a joint employer with one of its franchisees, this changed with the Browning-Ferris decision issued in 2015. Browning-Ferris substantially expanded the circumstances in which franchisors could face joint employment-related liability with their franchisees—a change that was widely decried within the franchise industry.
After a series of legal challenges, the NLRB issued a rule reverting to the “direct and immediate control” standard in 2020. While this rule also faced legal challenges, none ultimately proved successful. Nonetheless, they created a significant amount of uncertainty for both franchisors and franchisees. By legislating the “direct and immediate control” standard, the American Franchise Act seeks to put the issue to rest for good.
The International Franchise Association (IFA) has advocated for codifying the NLRB’s current joint employer standard for franchisees and franchisors, and it issued a press release supporting the American Franchise Act last month. As the press release states:
“The International Franchise Association (IFA) . . . praise[s] the introduction of the bipartisan ‘American Franchise Act’ in the U.S. House of Representatives, heralding the first-of-its-kind legislation as a landmark moment for America’s more than 831,000 franchise small businesses. IFA will be spearheading a full-scale national and regional advocacy push for the legislation . . . .”
The IFA has also published a one-pager discussing the history of the NLRB’s joint employer standard and the costs associated with the Browning-Ferris decision. In highlighting the need for legislation, the IFA writes that, “Over the past decade, the definition has unnecessarily become a partisan issue, changing four times, creating legal confusion, eroding trust, and stifling growth for thousands of small businesses across America.”
What Does the American Franchise Act Say?
So, what does the American Franchise Act say about the joint employer standard for franchisors and franchisees?
If enacted, the American Franchise Act would amend the National Labor Relations Act (NLRA) and the Fair Labor Standards Act (FLSA) to specifically address the definition of a joint employer in the franchising context. It would add new substantive language and defined terms to the NLRA while amending the FLSA to state that it incorporates the NLRA’s new provisions.
The key operative language in the American Franchise Act states:
“For the purposes of [the NLRA], a franchisor may be considered a joint employer of the employees of a franchisee only if the franchisor possesses and exercises substantial direct and immediate control over one or more essential terms and conditions of employment of the employees of the franchisee.”
The American Franchise Act then goes on to define the key terms in this operative language as follows:
“Essential Terms and Conditions of Employment”
The American Franchise Act states that in order for a franchisor to be considered a joint employer, it must have a substantial say in an employee’s “essential terms and conditions of employment.” The statutory language defines the “essential terms and conditions of employment” as “wages, benefits, hours of work, hiring, discharge, discipline, supervision, and direction.”
“Direct and Immediate Control”
“Direct and immediate control” is the crux of the issue for determining whether a franchisor is a joint employer under the current NLRB standard. The American Franchise Act retains this approach. Under the proposed statutory language, to be deemed a joint employer, a franchisor must exercise “direct and immediate control” over each of an employee’s “essential terms and conditions of employment” as follows:
- Wages – “A franchisor exercises direct and immediate control over wages if it actually determines the wage rates, salary, or other rate of pay that is paid to individual employees of a franchisee or job classifications of employees of a franchisee.”
- Benefits – “A franchisor exercises direct and immediate control over benefits if it actually determines the fringe benefits to be provided or offered to a franchisee’s employees.”
- Hours of Work – “A franchisor exercises direct and immediate control over hours of work if it actually determines work schedules or the work hours, including overtime, of a franchisee’s employees.”
- Hiring – “A franchisor exercises direct and immediate control over hiring if it actually determines which particular employees will be hired or which employees will not be hired.”
- Discharge – “A franchisor exercises direct and immediate control over discharge if it actually decides to terminate the employment of an employee of a franchisee.”
- Discipline – “A franchisor exercises direct and immediate control over discipline if it actually decides to suspend or otherwise discipline a franchisee’s employee.”
- Supervision – “A franchisor exercises direct and immediate control over supervision by consistently and directly instructing a franchisee’s employees how to perform their work or by actually issuing employee performance appraisals.”
- Direction – “A franchisor exercises direct and immediate control over direction by assigning particular employees of a franchisee their individual work schedules, positions, and tasks.”
Notably, the American Franchise Act also specifically states that certain activities will not constitute the exercise of “direct and immediate control” under these definitions. For example, with regard to hiring, the bill states that exercising “direct and immediate control” does not include “setting minimal recruiting and hiring standards, such as those required by law, for consumer or employee safety, or for brand protection.”
“Substantial Direct and Immediate Control”
After defining “direct and immediate control,” the American Franchise Act separately defines “substantial direct and immediate control” as used in the operative language quoted above. Under this definition, a franchisor’s “direct and immediate” control is “substantial” only if:
- The franchisor’s control has “a regular or continuous consequential effect on an essential term and condition of employment of a franchisee’s employees;” and
- The franchisor’s control is not “only exercised on a sporadic, isolated, or de minimis basis.”
Based on these definitions, a franchisor qualifying as a joint employer of a franchisee’s employees would be extremely rare, which is the point of the legislation. It will be interesting to see if the bill makes progress in Congress. It was referred to the House Committee on Education and Workforce on September 10, but we haven’t seen any activity since then. You can track the bill’s progress here.
Request a Call with National Franchisee Lawyer Jeffrey M. Goldstein
Jeffrey M. Goldstein is a national franchisee lawyer who has well over three decades of experience advising prospective franchisees and representing franchisees in dispute resolution proceedings with their franchisors. If you would like to speak with Mr. Goldstein, please call 202-293-3947 or request a call online today.
