What is the "Joint Employer" Decision and Why Does it Matter?

In July of 2014, the National Labor Relations Board (NLRB) unceremoniously dropped a hand grenade onto the entire United States franchise industry. By a vote of 3-2, the Board voted to name McDonald’s as a joint employer in 43 board-authorized cases which involved the mammoth fast-food franchise.

In September, attendees of the International Franchise Association (IFA) Public Affairs Conference on Capitol Hill asked members of Congress to sign a letter asking the NLRB to release an internal advice memo purportedly explaining the NLRB’s controversial decision regarding the McDonald’s cases. As of yet, there has been no response.

Franchisees Feeling the Pressure

Franchisees have been feeling increasingly suffocated under a chokehold of control by franchisors, who often control everything from the menu and the uniforms to the choice of location, and may even hold the lease. If a franchisor decides that a location is underperforming or otherwise undesirable, they may opt to discontinue the franchise and the lease, leaving the franchisee with nothing but equipment to sell and a non-compete clause preventing them from starting up a new business in the same location.

The way a franchise agreement is traditionally supposed to work is that a parent company provides its franchisees a guidebook and a basic method of operation and then allows them to operate independently. The lure of franchising is that the franchisee gets to run their own business, shielded by the virtual airbags of a successful brand name and product. As franchisors tighten rules and restrictions, however, potential franchisees become more reluctant to sign on. Should franchisors be held responsible for the actions of their franchisees in labor disputes as a “joint employer,” the future of the franchise industry could be in serious jeopardy.

According to IFA President Steve Caldeira, “If this ruling survives legal challenges, it will impose additional costs on franchisors associated with the need for more oversight and insurance against risk. Uncertainty about how this issue will be resolved could impede the growth of franchise business formation, employment and output — causing the performance of the franchise sector to fall short of this forecast based on economic fundamentals.”

Independent Businesses or Employees?

Essentially, treating franchisors as joint employers could change the whole relationship between franchisors and franchisees into one of employer and employee. Since franchisors could be held liable for everything from employee wages to worker harassment cases, they would be forced to exercise even tighter control over the daily operations of their franchises, a prospect as unpleasant and unviable for the franchisors as it is for the franchisees. This is surely a lose-lose situation that could potentially send the entire sector crashing down in 2015.

With strong positive returns over the last five consecutive years, the franchise industry has been a major driver of the economic recovery, so it makes little sense that the NLRB or any other government agency would venture to create a federal policy that would so radically inhibit growth in the sector. Especially since in a recent 2014 case in the California Supreme Court, an employee sued the Domino’s Pizza franchise after claiming she had been sexually harassed by her supervisor. In a 4-3 ruling, the Court refused to hold the franchisor liable as an employer.

Once again, this is a legal issue to be closely monitored in the coming months and years, one that could have a powerful influence over the future of the franchise industry. This is only Part 2 in a 3-part series around the issues faced by the franchise sector in 2015. Be sure to read Part 3 in the series, Minimum Wage, Obamacare and Franchises.