Changes in Joint Employer Liability

By James D. Woods, Ph.D., Chris W. Johnson, Marcy Wright  

Last April, the restaurant industry warily watched as a series of National Labor Relations Board (NLRB) hearings sought to name fast-food giant McDonald’s as a joint employer with its individual franchisees. We wrote in Franchising World about how changes in joint employer liability could affect franchisors and franchisees, potentially upending long-standing industry employment practices and causing major ripples throughout the restaurant and retail industries. 

The potential economic costs of such a significant change fostered worries in the restaurant sector that franchisors would struggle to absorb new costs for overhead and liability, and that some would ultimately need to buy back or shut down locations. Though the NLRB has offered some clarity around the standard in the months since the initial hearing, uncertainty remains.

What has the NLRB ruled so far?

In August 2015, the NLRB redefined its standard for determining joint employer status, expanding the standard that had been in place since 1984. In its decision, the NLRB asserted that an entity with the potential to exercise control over another entity’s employees–regardless of whether that control is directly exerted–is a joint employer and therefore obligated to assume responsibility for the other entity’s employment practices, such as participating in the collective bargaining process. This ruling has direct implications for restaurant franchisors, who might require franchisees to apply certain standards for the purpose of consistency or trademark protection. Because these practices can indirectly affect employment conditions of the franchisees’ workforce, some commentators have argued that they could satisfy the new standard for determining a joint employer. 

A few states, such as Michigan, Texas, Virginia and Wisconsin reacted with legislation designed to redefine “employer,” protect franchisors and maintain the traditional model the industry has operated under  for decades. The NLRB’s first application of the new joint employer standard, the Browning-Ferris case involving a Houston-based waste management firm, also offers some guidance as to which practices could precipitate a finding of joint employer status. Specifically, the NLRB stated that a parent entity could be considered a joint employer for another company’s (or companies’) workforce if it: 

• Maintains a common-law relationship with the employees in question, meaning the joint employer has control over what employees do and how they perform tasks, and
• Has sufficient control over employees’ essential terms and conditions of employment to permit meaningful collective bargaining. 

What’s on the horizon?

The issue is once again in the spotlight after the Department of Labor earlier this month issued new guidance broadening the definition of joint employer, explaining that under the Fair Labor Standards Act of 1938 and the Migrant and Seasonal Agricultural Worker Protection Act of 1983, “it is possible for a worker to be jointly employed by two or more employers who are both responsible, simultaneously, for compliance.” The NLRB is also preparing to hold hearings, though they’ve been delayed, to determine whether McDonald’s had a significant hand in setting work conditions for employees who were fired in association with wage protests in 2013.

What does this mean from an economic perspective for restaurants considering the impact of these changes on their business? While the uncertainty has eased somewhat since last year, it remains critical for franchisors to evaluate how their workforce-related practices may expose them to potential liabilities under a joint employer standard, such as employment-related lawsuits filed by their franchisees’ employees. Moreover, both franchisor and franchisee should consider analyzing the economic impact of any future employment practices they may implement through the lens of how those decisions may trigger a joint employer determination.