Franchise agreements have long been recognized as independent contractor agreements where a franchisor licenses its trademarks and business format systems to third-party franchisees—who each operate independent businesses using the trademarks and systems subject to the terms of the contract between them. This independent contractor model is favored by both franchisors and franchisees. Franchisors establish a franchise system because they want to expand the scope of its brand and system without the responsibility or expense of opening unit locations in multiple markets. Franchisees desire to own and operate a business that generates revenue, profit, and equity value that may one day be saleable. Neither franchisors nor franchisees want to be considered joint employers of the franchisees’ employees.
On October 25, 2023, the National Labor Relations Board (“Board”) issued a final rule that expands the definition of “joint employment” and which closely resembles the joint-employment standard issued in 2015 in Browning-Ferris Industries of California, Inc. 362 NLRB No. 186 (N.L.R.B.), 362 NLRB 1599, 204 L.R.R.M. (BNA) 1154, 80 Cal. Comp. Cases 946, 2014-15 NLRB Dec. P 16006, 2015 WL 5047768. Under the new rule, an entity may be considered a joint employer of employees if the entity shares or codetermines one or more of an employee’s “essential terms and conditions of employment.” The Board defines the “essential terms and conditions of employment” as: (1) wages, benefits, and other compensation; (2) hours of work and scheduling; (3) the assignment of duties to be performed; (4) the supervision of the performance of duties; (5) work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline; (6) the tenure of employment, including hiring and discharge; and (7) working conditions related to the safety and health of employees. The new rule will go into effect on December 26, 2023.
Simultaneously with its issuance of the new rule, the NLRB issued a fact sheet that explicitly addresses the concerns of franchisors and franchisees that the franchisees’ employees will be considered jointly employed by the franchisor:
The nature of the business-to-business relationship is incidental to the analysis established by the final rule. So, not all franchisors and their franchisees will be joint employers. Nor will all staffing or temporary agencies and their client employers. Rather, regardless of the business model, the joint-employer analysis is driven by the alleged joint employers’ relationship with the employees in question and their authority to control one or more of the employees’ essential terms and conditions of employment. The bottom line is that, while the final rule establishes a uniform joint-employer standard, the Board will still have to conduct a fact-specific analysis on a case-by-case basis to determine whether two or more employers meet the standard.
The fact sheet also documents the NLRB’s expansion of the proposed rule that was issued in September 2022 by requiring “joint employers” to bargain over “essential terms of employment”:
For the purposes of collective bargaining, once an entity is deemed a joint employer by virtue of its control over one or more essential terms and conditions of employment, it will be required to bargain over those particular essential terms and conditions as well as all other mandatory subjects of bargaining that it possesses or exercises the authority to control.”
This means that franchisors or others identified as “joint employers” may be required to collectively bargain with the employees of its franchisees on wages, benefits, hours of work, scheduling, assignment of duties, work rules, and working conditions—even if it does not directly control those conditions.
Because the Board will conduct fact-specific analyses on a case-by-case basis to determine whether a franchisor and franchisee meet the standard, franchisors will not know whether they are “joint employers” of its franchisees’ employees until and unless the franchisees’ employees seek to exercise the remedies provided by the NLRB. Regardless, the result of the new rule will be: (i) more findings of joint employment between franchisors and franchisees; and (ii) the unionization of franchisees’ employees that are “jointly employed” by a franchisor.
It will be important for franchisors to strive to establish that they do not share or codetermine their franchisees’ employees “essential terms and conditions of employment.” This will need to be done in operations manuals, franchise agreements, and in communication to franchisees. Franchisors will need to remind franchisees that they are solely responsible for establishing the essential terms of their employees’ employment and that the franchisor’s interests are tied specifically to brand protection through proper operations.