If you are a franchisor, and your franchisee is sued by one of its employees, will you be liable as a joint employer? This question has been asked repeatedly in the wake of the National Labor Relations Board’s 2015 Browning-Ferris ruling. Fourteen states have taken steps to ensure that, at least for the purposes of their own laws, the answer is “no.”
The NLRB decision, currently on appeal in the D.C. Circuit, established a two-part test for determining whether one entity will be liable as a joint employer of another entity’s employees. The test provides in part that a would-be employer must exert sufficient control over employees’ essential terms and conditions of employment to permit meaningful collective bargaining. Indirect or unexercised control may be sufficient to establish joint employer status, the board said. This broadened standard could have wide-ranging implications for a variety of business models, such as those that utilize franchises, contractors or staffing agencies.
The implications of the ruling for the franchise industry are of particular concern. It is now unclear whether a franchisor—an entity that typically controls the overall operations of a franchisee while allowing the franchisee to independently control matters such as compensation and discipline—could be jointly liable for unfair labor practices.
In the wake of the NLRB’s decision, several state legislatures have passed laws specifically aimed at protecting franchisors from joint employer liability. In recent weeks, Arizona, Kentucky, North Dakota, South Dakota and Wyoming have all enacted laws explicitly stating that franchisors aren’t employers of their franchisees or franchisees’ employees. Nine other states (and Puerto Rico) previously adopted laws that limit franchisors’ liability. The Arkansas legislature has also approved a measure on joint employer liability (not yet signed as of April 5), and similar bills have been introduced in states such as Nebraska, New Hampshire, South Carolina and Washington.
Traditionally, entities that exercised “direct and immediate” control over the terms and conditions of employment were subject to liability as joint employers. The Browning-Ferris decision rejected that standard, overturning approximately 30 years of precedent. A right or “reserved authority” to control can now establish joint employer liability, as can control that is exerted indirectly or “through an intermediary.” The Board stated that this new standard is more consistent with the purposes of the National Labor Relations Act and better suited to accommodate the diverse workplace arrangements that exist in today’s economy.
While the Browning-Ferris ruling is specific to labor relations issues, franchisors may be facing similar hurtles in other areas of employment. Moves by other federal agencies have indicated that joint employment standards may be broadening for purposes of the Fair Labor Standards Act, Family and Medical Leave Act and Occupational Safety and Health Act. Notably, the Equal Employment Opportunity Commission has filed an amicus brief in the Browning-Ferris appeal in favor of the NLRB’s new standard, finding it consistent with the approach that the EEOC already employs.
The notion that a franchisor could be liable as an employer of a franchisee’s employees has garnered some support. New York State, for example, has indicated that it will follow the NLRB’s lead. Attorney General Eric Schneiderman filed a lawsuit against Domino’s Pizza last year seeking a finding that, under state law, Domino’s is a joint employer of the employees working in 10 franchise stores named in the lawsuit. On March 9 of this year, the state settled with the franchisees, leaving the franchisors as the only remaining defendants. Additionally, Virginia’s governor recently vetoed a bill aimed at shielding franchisors from joint employer liability, saying that the bill would have exempted franchisors from “their obligations to Virginia businesses and workers.”
Many states, however, have taken the opposite stance, enacting laws in anticipation of the ramifications Browning-Ferris could have on the franchise industry. Some states have adopted laws stating that franchisors aren’t employers of franchisees or franchisees’ employees “for any purpose,” while others have added such language to specific statutes, such as their wage payment, workers’ compensation or employment discrimination laws. States have also differed as to whether a franchisor and a franchisee can agree in writing that a franchisor will be considered an employer or co-employer of a franchisee’s employees.
Eleanor Gerhards, a partner at Fox Rothschild LLP who concentrates in the area of franchise law, views these state legislatures as trying “to support the franchise industry because they see it as vital to economic growth.” Without such laws, a franchise system “could choose simply not to offer and sell franchises in a state where there is legal exposure for joint employer claims.” Gerhards says that she anticipates a further upswing in the number of states passing such laws if the “indirect control” standard in Browning-Ferris is upheld.
The D.C. Circuit Court recently held oral argument on the Browning-Ferris appeal, and the case may well be heard by the Supreme Court. Gerhards says although it isn’t possible to guess how the appeals court will rule, comments made by the judges indicate that the court is “highly scrutinizing” the indirect control standard. Even if the decision is upheld, the new standard may not last for long. As Gerhards notes, the NLRB currently has two vacant seats. Two new board members will be appointed by President Trump with the consent of the Senate and, once those new appointments are made, the Board may return to its prior “direct and immediate control” standard.
In any event, Gerhards explains, state legislatures are free to adopt their own standards when it comes to joint employment. “I expect the franchise industry and its supporters will continue to advocate for clarification of this issue at the state level to curb potential liability exposure,” she says. “The joint employer issue does not go away even if Browning-Ferris is overturned. Unfortunately, it is not that simple.”
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