A ray of light? NLRB opines franchisor is NOT a joint employer

In an opinion that caught close observers by surprise – particularly given the contemporaneous statements from the National Labor Relations Board’s General Counsel at a Senate hearing on May 14 – the NLRB’s Division of Advice opined that Freshii was not a joint employer with one of its franchisees.

This opinion appears to signal some retrenchment from the aggressive position the NLRB’s General Counsel has articulated on a number of occasions, including in its amicus brief in Browning-Ferris Industries of California Inc., claiming broadly that franchise systems cause “fissuring” in the employment arena and that franchisors should therefore be broadly held to be joint employers.

The Freshii’s opinion

Recently, the Associate General Counsel of the Board issued an advice memorandum finding that Freshii Development, LLC, a fast-casual restaurant chain and franchisor, is not a joint employer with one of its franchisees, Nutritionality, Inc. under either the NLRB’s current joint employer standard or the expanded joint employer standard the NLRB’s General Counsel advocated in Browning-Ferris Industries of California Inc.

The franchise agreement

The Freshii franchise agreement contains a typical grant of rights “to own and operate a Freshii Restaurant using [Freshii’s] business system, business formats, methods, procedures, designs, layouts, trade dress, standards, specifications and [trademarks], all of which [Freshii] may improve, further develop and otherwise modify periodically.”

Freshii provides an operations manual containing “mandatory and suggested specifications, standards, operating procedures and rules,” ie, “System Standards,” which may regulate any aspect of the operation and maintenance of the restaurant, including, “. . . staffing levels, appearance, service, and job functions for restaurant employees; . . . standards for training managers; . . . payment systems; and any other aspects of operating and maintaining the restaurant that Freshii determines to be useful to preserve or enhance the efficient operation, image, or goodwill of Freshii.”

Notably, the franchise agreement specifies that these System Standards do not include “‘any personnel policies or procedures,’ which Freshii may make available for franchisees’ optional use, and that the franchisee alone will ‘determine to what extent, if any, these policies and procedures might apply’ to its restaurant operations.” These “optional” materials include a sample handbook and guidance on human resources matters, such as hiring, scheduling, disciplining, and discharging employees. According to the franchise agreement, Freshii “neither dictates nor controls labor or employment matters for franchisees and their employees . . .”

The NLRB’s finding

The Associate General Counsel’s finding rests upon the conclusion that there was “no evidence that Nutritionality shares or codetermines with Freshii matters governing the essential terms and conditions of employment of Nutritionality’s employees.” With respect to the NLRB’s current joint employer standard, the Associate General Counsel found:

• Freshii played no role in its franchisee’s decisions regarding hiring, firing, disciplining or supervising employees
• Freshii was not responsible for determining the wages, raises or benefits of the franchisee’s employees
• Freshii was not involved in the franchisee’s scheduling and setting work hours of its employees
• The required trainings that owners and managers attended prior to opening a franchise dealt primarily with operating a restaurant; Freshii had no involvement in any future trainings offered by the franchisee
• Sections of the operations manual, other than the recipes and décor elements, were offered as recommendations rather than mandatory requirements
• Inspections were limited to ensuring compliance with Freshii’s mandatory brand standards and not any employment-related policies
• Freshii did not meaningfully affect the terms and conditions of the franchisee’s employees through its contractual right to terminate the franchise agreement

Notably, the Associate General Counsel wrote, “All of this evidence is consistent with the clear language of the franchise agreement, which gives the franchisee the power to determine whether to use Freshii’s personnel policies or procedures and states that Freshii ‘neither dictates or controls labor or employment matters for franchisees and their employees . . .”

Under the NLRB’s proposed expanded standard, a franchisor would be determined to be a joint employer with a franchisee if it exercises “direct or indirect control” over working conditions of the franchisee’s employees, has the “unexercised potential to control” working conditions of the franchisee’s employees, or where the “industrial realities” make the inclusion of the purported joint employer essential to meaningful bargaining. In finding no joint employment relationship between Freshii and Nutritionality under this standard, the Associate General Counsel concluded, without offering any additional factual analysis:

As discussed above, Freshii does not significantly influence the working conditions of Nutritionality’s employees. For example, it has no involvement in hiring, firing, discipline, supervision, or setting wages. Thus, because Freshii does not directly or indirectly control or otherwise restrict the employees’ core terms and conditions of employment, meaningful collective bargaining between Nutritionality and any potential collective-bargaining representative of employees could occur in Freshii’s absence.

The franchise agreement’s influence

While the memorandum does little to explain the differences in the two joint employer standards – in fact, the Associate General Counsel seems to rely upon the same facts without distinction to reach the same conclusion under both standards – it does highlight the importance of having appropriate language in the franchise agreement and underscores the NLRB’s consideration of the unique facts of every individual case. Language of the franchise agreement, by itself, may not be determinative of the joint employment issue, but the Associate General Counsel’s focus on it in this instance indicates that it is influential, particularly when the parties’ practices are consistent with it.

It remains to be seen whether this particular opinion is a ray of light shining on the NLRB’s apparently dim view of franchising. If at all, it seems to suggest that, even under the NLRB’s proposed expanded standard, there are ways franchisors can avoid being deemed joint employers with their franchisees with appropriately drafted agreements and practices that clearly draw a line on directing or influencing franchisee employment practices.

Find out more about the implications of this opinion by contacting the authors.