Why Franchise Owners Just Got Very Nervous

Elizabeth Sigety, a partner at Fox Rothschild.

In case you’re just back from vacation and have not kept a close eye on the business press, you may have missed the recent Browning-Ferris Industries decision issued on August 27 by the National Labor Relations Board (NLRB). Voting in a 3-2 decision along partisan lines, the NLRB overturned the ‘joint employer’ standard which has existed for the past three decades. This is a highly important decision because if a company is a joint employer, they could then be subject to collective bargaining and a large variety of employment-related claims formally reserved for the direct employer.

For Philadelphia’s strong franchisor and franchisee community, whether they be focused on soft pretzels, salads, coffee, or any number of quick-service entrepreneurial opportunities, August 28th meant waking up to a different world. The old standard required that a company utilizing the services of employees of another company would be considered a joint-employer only if it had “direct control” over working conditions – such as the direct ability to hire and fire employees. The new standard states that two or more employers are joint employers if they “share or codetermine those matters governing the essential terms and conditions of employment.”

In reading the decision of the NLRB, what are considered the “essential terms and conditions of employment” now seems somewhat unclear – both respecting the breadth and importance of each. They certainly include, as the opinion states, “hiring, firing, discipline, supervision, and direction,” but the NLRB states that it intends to be inclusive and that this list is “non-exhaustive.” This is what is making some folks — especially in the outside staffing and in the franchise industry — very nervous.

The actual facts of the decision concern the use by Browning-Ferris Industries (BFI) of an outside staffing firm. The union wanted to represent the workers employed by the staffing firm and argued that they should be deemed employees of BFI and thus able to be part of the union.

But, instead of simply ruling on this case, the NLRB took the opportunity to restate its position generally into one that would capture far more contractual relationships than before. The minority dissent points to this concern and the uncertainty created by the decision in addition to the complexity of business relationships it creates. For example, if this were a franchise and the union brought a successful petition that the employees of one franchisee location should be deemed employees of the franchisor through the joint employer doctrine, how might this effect other franchise locations, each owned by different people? Who is ultimately sitting at the collective bargaining table? While the decision makes clear that the choice of whether an entity is a joint employer is fact-specific and does not automatically apply to other business models, the way that staffing, franchise or other businesses should move forward is uncertain.

In the franchise context, if the franchisor requires that a fast-food restaurant be open from 11am to 11pm every day, that the food be prepared in a certain manner, and that the employees wear certain uniforms, does that mean that the franchisor is co-determining matters governing the conditions of employment? Under law, in order for a franchisor to maintain ownership and control of its trademark, it must protect the brand quality behind that mark. If it loses this control, it can lose rights to its mark. So trademark law mandates that a franchisor maintain a level of control — especially relating to quality and product. Don’t you want the same cup of coffee every time you go to your favorite local franchised coffee shop?

Yet, these two sets of laws pull the franchise industry in opposite directions. Franchisors fear that certain support and controls create a risk that the NLRB may make the franchisor a joint employer. This could result in franchisors withdrawing valuable support, resources and brand protections for fear that these resources may be used as evidence of control or that the franchisors will feel they have to exercise more control in order to ensure there are fewer potential claims against them.  Franchisees are independent businesses and do not want the franchisor telling them who to fire or how to run their business on a day-to-day basis. On the other hand, franchisees also enter into a contract in order to benefit from the brand name, experience and support being offered.  So, what to do?

This issue is not going to go away any time soon. Supporters of employers and small businesses will struggle to protect their rights to run their business and the current NLRB and unions will continue to “encourage the practice and procedure of collective bargaining.”  Philadelphia is home to a vast number of franchised businesses — both franchisor and franchisee — who will be keeping a close watch on developments resulting from the NLRB decision. There are sure to be many hours and dollars spent around this divisive issue.

Elizabeth Sigety is a partner with Fox Rothschild, chair of the firm’s Franchising, Licensing & Distribution Group, and a co-chair of the firm’s Emerging Companies Practice Group.