The Joint Employment Liability Debate Lingers
Last year, joint employment was a very hot and contentious topic, with McDonald’s at the heart of it. This year, it has continued to be in the news.
Since 2015, companies have been operating under an informal guidance from the National Labor Relations Board (NLRB) that defined joint employment as when a company exercises any control over working conditions or if it reserves the authority to do so—a significantly larger umbrella than previously. The ruling potentially put franchise headquarters on the hook for working conditions at a franchise in addition to the individual franchisee, a situation that many franchise industry leaders rebuked.
With moves taken last year, it can be concluded that the new U.S. Secretary of Labor, Alexander Acosta, also felt that the previous rulings were too broad in reach.
In June, Acosta withdrew the informal guidance from 2015, as well as an additional one made in 2016. The withdrawal reestablished that joint employment liability can only come with “direct control” over a worker’s situation. The reversal of direction was solidified in December when the National Labor Relations Board (NLRB) officially overturned the precedent, which was being used by workers to challenge companies like fast-food and hotel chains over labor practices they felt were detrimental to them.
The IFA, which had lobbied for the reversal, was pleased with the decision. On the day the decision was announced, IFA Senior Vice President of Government Relations & Public Affairs Matt Haller said, “Today's decision helps create certainty for franchisors and franchisees in the near term and highlights the need for long-term certainty in this area.”
Although the decision in effect decreased the official standard of liability for employers in many cases, the Department of Labor was sure to remind employers of their responsibility to workers in its mid-year release on the matter, reminding employers of their responsibilities under the Fair Labor Standards Act and the Migrant and Seasonal Agricultural Worker Protection Act.
But issued guidances are only a guideline, not a whole say on the matter in terms of law. The latest development in the joint employment saga is an indication that Peter Robb, new general counsel of the NLRB, is moving towards settling the McDonald’s case.
However, legal observers point out that even with a settlement the story may not end there. “You're not going to get a joint employer finding from this board, but at least there's a record,” former NLRB chair Wilma Liebman has said, noting the NLRB often reverses itself when another party takes power. “It's a setback [for those who brought the complaints forward], but I don't know that I would call it permanent.”
UPDATE: Things continue to shift. In late February 2018, the December 2017 ruling was vacated because one of the voters should not have voted on the matter due to a conflict of interest.
UPDATE 2: In March 2018, McDonald's reached a settlement that allowed it to avoid being designated a joint employer of workers at McDonald's franchises, meaning the corporate office won't be held liable for its franchisees' violations. The settlement terms weren't immediately available.
Brazil Also Addresses Joint Employment
Meanwhile in Brazil, the Brazilian Franchise Association (ABF) hopes to decrease the legal risks of franchising in Brazil and formally clarify the positions for all the parties involved in a franchise agreement via a new Franchise Disclosure Act.
The new Franchise Disclosure Act is intended to fill in the gaps left by the original Franchise Disclosure Act. The original act, which entered into Brazilian law in 1994, didn’t regulate the relationship between the parties, and – maybe most importantly – it didn’t explicitly express the liabilities of any of the parties involved. A fact that some employees and labor unions are trying to exploit in current disputes. To this point in time, the Brazilian Labor Courts have been concluding the definition of a franchise within the original act is sufficient enough to not assign joint employer status in many cases.
Within the bill the new Franchise Disclosure Act is filed under states that “a franchise shall not characterize a consumer relationship, ‘economic group,’ nor characterize an employment relationship, between the franchisor and the franchisee or the franchisee’s employees, even during the training period.” A clarification the ABF hopes decreases the number of court battles franchisors and franchisees go through.
For more details, please see our post on Brazil’s new Franchise Disclosure Act.
SBA Franchisor Approval Gets an Update
The confusion over franchise joint employment has also had a significant impact on financing, more specifically franchising involving the Small Business Administration (SBA). The agency offers guarantees to banks that participate in its programs for the loans they grant.
In searching for financing options, franchisees will likely come across franchises that state they are “SBA approved” or something to that effect. During the loan application process, lenders have to vet the person they’re giving their money to, as well as the business system they want to run. In a franchise situation, that means vetting the franchisee and franchise system itself. Franchises that are SBA approved have pre-vetted themselves for future loan applications related to their franchise.
As a result, the SBA loan process is streamlined for the franchisee – not entirely avoided. The potential franchisee still has to prove that he or she is a good candidate for the loan. It’s similar to TSA Pre-check at an airport. Travelers with TSA Pre-check still have to go through security, but since they’ve already registered with the appropriate authorities they don’t have to spend as much time going through the security line as everyday travelers.
Up until January 1, 2018, in order to streamline the vetting process franchisors would add an amendment to their franchise agreements and have their franchise listed on the Franchise Registry of third-party vendor FranData. Now, the SBA is bringing the list in-house.
The change is largely spurred by the SBA’s mandate to guarantee loans for independent small businesses only. The debate over joint employment forced the SBA to review its polices pertaining to franchises and determine if franchisors are retaining too much control, often referred to as affiliation, over their franchisees for each franchisee to be considered an independent business owner.
To be a part of the SBA’s Franchise Directory, franchisors will now have to use the SBA’s standard addendum or use their own addendum. The addendum binds franchises to criteria that ensure franchisees will have dominion over their own businesses. Franchises using their own addendum must submit their addendum each year to show the terms of affiliation within their franchise agreements are unchanged from the previous year.
The items covered by the SBA’s addendum include: events of transfer, forced sale of assets, real estate covenants, and employment of the franchise unit. Just under 75% of the Top 100 franchises (72) have fulfilled the requirements of the SBA for the Franchise Directory as of the beginning of 2018. It should be noted of the 28 that aren’t listed on the Directory, 11 are primarily based outside of the U.S.