Understanding Joint Employment and Why It Spooks Franchisors

By Michael H. Seid, Joyce Mazero

Unfortunately for franchisees and franchisors, regulatory actions by the NLRB and the DOL are changing how franchise systems are managed and how a franchisor can support a franchisee today. And these changes, while benefiting the unions, are not beneficial to you as a franchisee.

Who is the employer anyway?

Question: Who is the employer of a franchisee’s employees? The question may sound simple, but the answer today may not be obvious. The franchisee is the sole employer of its staff. With the exception of required brand standards, franchisors generally don’t have any contractual rights to directly control any of the human resource practices independently established by the franchisee. But under certain circumstances, the NLRB and the DOL would like franchisors to be deemed joint employer with their franchisees to make it easier for unions to organize workers.

Private sector labor unions have been in decline for decades, and today less than 6.5 percent of private sector workers are members of a trade union. This is a decline from proximately 35 percent in the 1950s. Because franchisees have the sole responsibility to make all human resource decisions like hiring, firing, disciplining, supervising, and directing their staffs, unions have never been able to effectively organize franchisees’ employees.

Recently the NLRB and DOL’s Wage and Hour Division have led efforts to expand the definition of employer administratively in support of SEIU’s desire to organize franchisees’ staff. To overcome the problem of independent business ownership, the NLRB and DOL administratively changed the recognized standard of employer from direct control and expanded it to include indirect or even merely potential control.

As franchisors and franchisees share a brand and franchisors are required to establish brand standards, the NLRB and DOL have sought to include brand standards as an indication of indirect or potential control. By changing the recognized historic definition, the NLRB and DOL have dramatically expanded the definition of joint employment. When two companies like a franchisor or franchisee are found to be joint employers, the major benefit to SEIU and other unions is that it makes union organizing possible in franchising. This change has also impacted many additional industries, including those in which independent contractors and others in the gig economy work today.

The NLRB and the DOL’s revised definition is being challenged by franchisors and others in court. Congress is considering legislation to overturn the administrative decisions of the NLRB and the DOL, and several states have recently enacted laws setting the prior standard as the law in their states. It can be expected that under the Trump administration the joint employer definition will be returned to its historic meaning by the NLRB, reversing its administrative ruling. Stay tuned.

The change in the definition of joint employer has caused some disruption in franchising in the past few years, and franchisors have changed how they support their franchisees to avoid triggering a claim of joint employment. Until the joint employer definition is returned to its historic meaning, you can expect to see franchisors change things like training, support, and even the software provided to you as a franchisee.

The role of the franchisor in human resources policies

A franchisee is responsible for developing and implementing their own human resources policies. Even with the new joint employer standard, franchisees can still ask their franchisor for recommendations on human resource policies and samples, and most franchisors will be able to provide that material.

Traditionally, franchisors have included a human resources section in their operations manuals and training programs and have also provided their franchisees with scheduling and other human resource–related software to help franchisees better manage their businesses. When included, the manual may provide the franchisee with recommendations and sample materials on the following:

  • Applications and other hiring tools
  • Guidance on anticipating management and staffing needs (which vary depending on volume, type of location, and maturity of your business)
  • Hiring evaluation
  • Human resources paperwork
  • Interview preparation
  • Interview questions and techniques
  • Job descriptions and staff responsibilities
  • Job features and benefits you can use in recruiting candidates
  • Profiles of the types of candidates you should be looking for
  • Recommended pay plans and bonus plans
  • Recruiting sources
  • Recruiting techniques and strategies
  • Recruiting tools such as brochures, ad slicks, letters, in-store signage, and so on
  • Reference checklists
  • Telephone techniques for recruiting
  • Disciplinary policies
  • Scheduling recommendations

Increased sensitivity to the potential liability of looking like a joint employer to its franchisees’ employees is causing some franchisors to reevaluate the type of support and guidance provided to franchisees for employment and personnel matters. As a result, some franchisors are deleting the human resources section from their operations manuals. As an experienced franchisor lawyer and franchise consultant, your authors view this as an overreaction by franchisors when they make these types of changes. Both your authors recommend getting a second opinion should your lawyer recommend removing the material, as modifications can be effective.

Although franchisors want to avoid the appearance of control over a franchisee’s personnel decisions, it is important for franchisees — many of whom are new to managing a business — to have this beneficial support. In addition, franchisors are still entitled to implement controls over their trademark, advertising, quality control, unit appearance, and other uniform standards intended to protect the brand or the quality of customer service.

Interestingly, these types of control are precisely the requirements for being a franchisor under the FTC Rule and are also necessary to protect the franchisor’s intellectual property under the Federal Lanham (Trademark) Act. Unfortunately — and this is part of the challenge franchisors and others are facing — the new NLRB and DOL joint-employer standard conflicts with other requirements under the federal law.