Franchisors may be more liable for employees under broadened joint employer rule

Joanna Fantozzi

The National Labor Relations Board just issued a final labor rule that broadens the joint employer rule to make companies jointly liable with their franchisees for labor terms and conditions such as union contracts, pay, scheduling, and more, reviving an Obama-era rule that was limited in scope during the Trump Administration.

Moving forward, franchisors will likely need to become more involved in creating and enforcing workplace policies, something that previously was left mainly up to franchisees. According to the National Labor Relations Board, this is a legal course correction back to the way the joint employer rule originally worked.  

“The Board’s new joint-employer standard reflects both a legally correct return to common-law principles and a practical approach to ensuring that the entities effectively exercising control over workers’ critical terms of employment respect their bargaining obligations under the NLRA,” NLRB chairman Lauren McFerran said in a statement. “While the final rule establishes a uniform joint-employer standard, the board will still conduct a fact-specific analysis on a case-by-case basis to determine whether two or more employers meet the standard.”  

Trade organizations and business groups have pushed back against the ruling, with the National Restaurant Association and Restaurant Law Center, stating that it will “create chaos and legal questions” across the industry, as restaurants with franchisees try to figure out how to change their operational policies to fit the new rule.

Related:Working Lunch: Colorado poised to adopt Obama-era joint employer standard

“Today’s final rule on joint employer is a heavy blow to small business restaurant operators,” Sean Kennedy, executive vice president for Public Affairs at the National Restaurant Association said in a statement, adding that almost one-third of the restaurant industry would be affected by this rule. “The rule upends employment policy, adopting a far-fetched definition of ‘employer’ based on ‘indirect or potential influence’ of an employee and then fails to define how ‘indirect control’ will count toward a joint employer relationship.”

The previous rule, which was finalized by the Department of Labor under the Trump administration in Jan. 2020, adopted a four-part test for assessing whether a company is a joint employer of another company’s workers, like the franchisor-franchisee relationship. Previously, companies were given joint employer status if they exercised “direct and immediate control” over the key terms of another organization's employees, like a franchisee. Now, that definition has been expanded to companies jointly classified as "sharing or co-determining” employment terms (like pay, scheduling, workplace rules, etc.).

Related:Working Lunch: NLRB undoing Obama-era regulations

Companies that are identified as joint employers under the new rule will now be compelled to participate in collective bargaining with unions. Previously, the legal distance between franchisors and employees of franchisees had deterred most employees of franchised companies from unionizing. But now this could open the door to more union activity in the heavily franchised restaurant industry.

Of course, this is not the first time that this issue has pitted the rights and protections of labor activists and employees against the rights of corporations and business owners. When the joint employer rule was first expanded under the Obama administration, the National Labor Relations Board designated McDonald’s as a joint employer in a 2014 case that McDonald’s called a premeditated attack by unions seeking to organize fast-food workers.

According to the National Restaurant Association the expansion of the ruling not only shares legal risk between franchisors and franchisees, but also raises questions about joint liability with third-party contractors and reduces the lure of franchisee independence.  

Contact Joanna at [email protected]