Controversial New NLRB Ruling Could Force Changes to Franchise Model

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Over an impassioned dissent by two of its five members, the National Labor Relations Board (the NLRB) has issued a decision against Browning Ferris Industries (BFI), in which it jettisoned several decades of precedent and imposed a new standard for determining when a business will be considered a “joint employer.”

Under the previous standard, a business had to exercise “direct and immediate control” over another entity’s workers to be considered a joint employer. The new test focuses more on whether the business has the potential to exercise control over workers’ wages and working conditions, even if that control for the most part is not exercised. The NLRB justified its new standard by claiming that the previous standard was “increasingly out of step with changing economic circumstances” and did not sufficiently account for which party held true economic power in these relationships.

The BFI case involved a company using a staffing supply contractor. But, as illustrated below, the NLRB’s new standard could also be applied to franchisor-franchisee and other business relationships.

How the NLRB Applied Its New Standard in the BFI Case

BFI had a contract with Leadpoint, a staffing services company, to supply workers at a BFI recycling facility. A union election was conducted among the workers. At issue was whether BFI was a joint employer and thereby obligated to recognize and bargain with the union.

BFI and Leadpoint kept separate supervisors and lead workers at the facility, as well as separate human resources departments. The contract between BFI and Leadpoint designated Leadpoint as the sole employer and stated that Leadpoint should not assign workers to BFI for more than six months.

Critical to the NLRB majority, however, was that the contract gave BFI the power to tell Leadpoint to fire a worker and to decide the operating hours of the facility. In the NLRB’s view, these and other factors enabled BFI to effectively dictate working conditions and therefore “indirectly control” them, even if BFI only occasionally exercised those rights. BFI therefore was found to be a joint employer and obligated to recognize and bargain with the union of Leadpoint’s workers.

Implications of the NLRB’s Decision for Franchisors

Some of the factors considered by the Board in the BFI case are also present in many franchisor-franchisee relationships. Franchisors often do retain certain powers that, if exercised, could affect the wages and working conditions of the franchisee’s employees. The BFI decision therefore may not augur well for franchisors. Indeed, the franchise model already is under review by the NLRB as a result of a series of unfair labor practice complaints issued by the NLRB’s General Counsel seeking to hold franchisor McDonald’s, USA, LLC liable for unfair labor practices alleged to have been committed by its franchisees.

This development may have practical consequences: If franchisors feel they will be liable for actions committed by their franchisees, they may decide to exercise tighter control over them, such as requiring personnel actions to be reviewed and approved by their human resources departments. But this would go against the grain of the franchise model. It is precisely the freedom from such interference in the day-to-day control of their operations that attracts aspiring franchisees.

Some franchisors, already motivated by other regulatory developments, may find other ways to adjust how they do business. For example, fast food franchisors may be encouraged to follow McDonalds’ lead in rolling out self-service kiosks to avoid labor costs and exposures.

Some Hope for Franchisors 

On the other hand, there are indications that there may be ways franchisors can adapt to the NLRB’s new standard. In the course of its opinion in the BFI case, the NLRB majority did acknowledge that the user/staffing agency business model is distinguishable from the franchisor/franchisee model. It stressed that its application of the new standard was limited to the facts and circumstances presented in the BFI case.

Also, a non-binding memorandum issued in May 2015 by the NLRB’s Division of Advice may provide some guidance to franchisors for avoiding joint employer status. The Division of Advice concluded that fast food franchisor Freshii Development LLC was not a joint employer with a franchisee. The memorandum relied on the fact that Freshii’s franchise agreement gave it no role in its franchisee’s hiring or firing decisions or wage and hour matters. At most, Freshii’s control was limited to ensuring a standardized product and customer experience.

In the meantime, the NLRB’s BFI decision may not be the last word on the matter. It likely will be appealed. It also remains to be seen how the NLRB will address the many fact patterns and issues that the BFI case did not address. In the interim, it is clear that the legal landscape has shifted dramatically.

Irving M. Geslewitz is a Principal in the Labor & Employment practice group at Chicago-based law firm, Much Shelist. He represents clients in a broad array of matters related to employment laws and labor relations, and has extensive experience representing employers and executives on issues or disputes arising out of the employment relationship.

Irv speaks frequently on a wide variety of employment law topics at seminars for industry, trade and professional groups, as well as for continuing education organizations and academic institutions. He has also prepared articles for a number of professional journals, including Practical Lawyer, the Commercial Law Bulletin, and the Labor Law Journal.

Irv is a member of the American Bar Association (Section of Labor Law and Committee on Employee Rights and Responsibilities) and the Chicago and Illinois State Bar Associations. 

His professional accomplishments have been recognized by Martindale-Hubbell, which has awarded him an “AV” rating, the highest rating available. Irv has been recognized by the Leading Lawyers Network as a top Illinois lawyer in the areas of management-side employment and labor law (2003-2014). He has also been designated an Illinois Super Lawyer (2006-2015), an honor given to the top 5% of attorneys in the state.

Irv can be reached at igeslewitz@muchshelist.com or 312-521-2414.