Top franchise decisions: two standouts from 2015

Intellectual Property and Technology News

Perhaps the most significant decision last year affecting franchising was not issued by a court and did not involve a franchise system. In an August 27, 2015 decision, the National Labor Relations Board (NLRB) in Browning-Ferris Industries of California, Inc. decided, in a sharply divided opinion, to discard 30 years of NLRB precedent and adopt a broader and looser standard for determining joint employer status. Under the new standard, a putative joint employer is no longer required to exercise “direct and immediate” control over workers’ terms and conditions of employment. “Indirect” or even “reserved” control is now potentially sufficient to establish a joint employment relationship. This decision has potentially far-reaching implications for a large number of industries – in particular, franchising.

At issue was whether Browning-Ferris Industries was a joint employer of recycling facility workers who were provided by a staffing agency under a temporary labor services agreement. The NLRB, noting the explosive growth of “contingent workers” in recent decades, used this as an opportunity to revisit its joint employment standard.

The NLRB re-affirmed the “core” of its joint employer analysis – that an entity will be deemed a joint employer where it “shares or codetermines those matters governing the essential terms and conditions of employment.” However, the Board abandoned the historic requirement that a putative joint employer exercise “direct and immediate” control over workers’ terms of employment, determining it will now also consider “indirect” control exercised through an intermediary employer (such as a staffing agency), as well as a party’s reserved contractual rights to control workers’ terms and conditions of employment, even if that control is not actually exercised.

The NLRB clarified that it will not limit its inquiry to control over hiring, firing, discipline, and supervision. It will also consider a putative joint employer’s control over other matters that may impact employment practices, such as the number of workers to be supplied, scheduling, seniority, overtime approval, and the assignment of work.

How this new test for “joint employer” will be applied in franchise settings remains to be seen, though another NLRB decision last year provides some hope for franchisors in avoiding joint employer status.

In an advice memorandum issued a few months before the Browning-Ferris decision, the Associate General Counsel of the NLRB found in Nutritionality, Inc. d/b/a Freshii that Freshii Development, LLC was not the joint employer with Nutritionality, Inc. (its franchisee) under the NLRB’s then-existing joint employer standard or a broader standard proposed by the NLRB’s General Counsel.

Freshii provided the franchisee with an operations manual containing mandatory and suggested specifications and operating procedures (“System Standards”) typical of most franchise systems. The franchise agreement specified, however, that System Standards did 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.’” Although the operations manual contained some guidance on human resource matters, Freshii did not require its franchisees to follow that guidance.

Under the NLRB’s then-existing joint employer standard, the Associate General Counsel found that Freshii’s control over the franchisee’s operations was “limited to ensuring a standardized product and customer experience, factors that clearly do not evince sharing or codetermining matters governing essential terms and conditions of employment.”

The Associate General Counsel also found that Freshii was not a joint employer under the “totality of the circumstances” standard the General Counsel urged in its amicus brief in Browning-Ferris. Freshii did “not significantly influence the working conditions of Nutritionality’s employees;” it had “no involvement in hiring, firing, discipline, supervision, or setting wages;” and because it did “not directly or indirectly control or otherwise restrict the employees’ core terms and conditions of employment, meaningful collective bargaining” could occur in its absence. Therefore, the joint employer concept did not apply. Because this test is arguably broader than the standard adopted in Browning-Ferris, it is likely that Freshii would not have been considered a joint employer under Browning-Ferris either.

Given the developing law on joint employer in the franchising context, 2016 should be an interesting year.

Find out more by contacting the authors.