Gallet Dreyer & Berkey, LLP | Franchise Law Update: NLRB Steps Up Actions to Hold Franchisors Liable for Franchisees’<br > Violations of Federal Labor Laws
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Franchise Law Update: NLRB Steps Up Actions to Hold Franchisors Liable for Franchisees’
Violations of Federal Labor Laws

2/11/2016 | By: David T. Azrin, Esq. | Winter 2016 Newsletter
The National Labor Relations Board, which enforces federal union laws, continues to step up its enforcement actions to hold franchisors liable for franchisees’ alleged violations of the federal union laws and to potentially give franchisees’ employees the right to collectively bargain directly with franchisors.

To protect themselves from this increased liability under the current political cli­mate, franchisors should stay away from their franchisees’ employment decisions and should make sure their franchise agreements and operations manuals clear­ly provide that employment decisions are the sole responsibility of the franchisee.
In August 2015, the NLRB – in a divided decision by a three member majority of the five person Board – issued a decision in Browning-Ferris that announced a new standard of liability for holding one com­pany liable for another company’s actions toward its employees under a “joint employer” theory of liability.

Up until this decision, the NLRB’s stan­dard for the “joint employer” theory of liability generally required that a company could only be held liable as a joint employ­er if it actually exercised control of the other company’s employment decisions. In the Browning-Ferris case, the NLRB held that the mere power or “potential” to exercise such control might be sufficient to be held liable.

The Browning-Ferris decision has created significant anxiety in the franchisor com­munity, although it dealt with a staffing agency rather than a franchisor and it spe­cifically stated that the NLRB was not deciding whether this new standard would apply to franchisors. The franchisors are nonetheless fearful that the NLRB will extend this theory to them.

If this occurs, there will undoubtedly be wide-ranging implications. Since most franchise agreements give the franchisor some authority to exercise control over certain aspects of the franchisees’ opera­tions, franchisors could be held liable for many of the franchisees’ actions toward their employees. In addition, franchisees’ employees could potentially be given the right to collectively bargain as a group directly with the franchisor.

The NLRB signaled that it may be headed toward applying this new standard to franchisors a year ago when one of its regional offices, with the NLRB ’s approv­al, accepted the filing of 13 administrative cases against McDonalds. These cases were based on an unfair labor practice charge by the Service Employees Interna­tional Union, which sought to hold the franchisor liable under the “joint employ­er” liability theory for allegedly violating the franchisees’ employees’ right to engage in concerted group activity that might lead to the formation of a union.

McDonalds has vigorously attempted to dismiss the 2014 complaints, thus far to no avail. For example, in August 2015, the NLRB (in a divided opinion) rejected a request by McDonalds to dismiss the complaints unless the NLRB provided a more detailed explanation for the specific factual basis for the claim that McDonalds can be held liable as a joint employer. As a result, the NLRB’s administrative actions against McDonalds continue forward.
The NLRB’s approach toward employers generally follows the political views of the current or the most recent President’s administration. The NLRB is governed by a five person Board, each appointed for a five year term by the President, with the consent of the Senate.
Thus far, despite vigorous lobbying efforts by the franchisor and business community, Congress has not taken action to enact legislation to protect franchisors from enforcement under this new theory of liability. In December 2015, Congress failed to include a rider to the omnibus budget bill, which was supported by many franchisor and business groups. The rider would have limited the NLRB’s authority to hold companies liable under the “joint employer” theory of liability.
In the meantime, franchisors will need to make sure they do not involve themselves in the employment decisions of their franchisees to avoid being held liable for their employment actions. Also, franchi­sors should review their franchise agreements and operations manuals to make sure they clearly provide that all employment decisions are the sole respon­sibility of the franchisee.