August 31, 2015

NLRB Joint-Employer Decision is Franchising ‘Game-Changer,' FaegreBD Partners Tell Restaurant Finance Monitor

An August 27 ruling issued by the National Labor Relations Board (NLRB) has changed the "standard for determining joint employer status" in a development the Restaurant Finance Monitor called "the day many franchised businesses feared." The decision broadens the definition of joint-employer status such that workers that would previously have been considered employees of a franchise unit may now be construed as employees of the parent company—a shift that Kerry Bundy, Faegre Baker Daniels partner, said "strips both the franchisor and franchisee of the benefits of the franchise model."

"One of the primary benefits for the franchisor is being able to grow its brand more rapidly by licensing its marks and business format to independent third parties, who can then operate their own businesses and manage their own employees," Bundy said, adding that it also takes control away from franchise operators seeking "the opportunity to own their own business."

Ken Levinson, FaegreBD partner, said that broader joint-employer status could turn issues such as minor problems in an employee's tax reporting—typically meted out at the franchisee level—into litigation bait now that the larger coffers of a parent company could be at stake.

"[Franchisors] would have no idea they have that liability, they certainly haven't planned for it or set money aside for it," Levinson said.

To prepare for the changes, Bundy said franchisors should revisit their franchise contracts and be sure to “definitively outline operational independence.”

“Ensure that the franchise agreement states that the franchisee has sole responsibility for personnel and employment issues and control – that’s what you want to make sure is in there,” Bundy said. “It’s about planning. Franchisors that aren’t sued right now on these issues should be the ones working as hard as they can behind the scenes to protect themselves against future lawsuits.”

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