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Late last week the National Labor Relations Board (the “Board”) issued its Final Rule addressing the Standard for Determining Joint-Employer Status under the National Labor Relations Act (the “Act”). The effective date of the new rule is December 26, 2023.

Under the Board’s new rule, an entity may be a joint employer of a group of employees if each entity has an employment relationship with the employees and they share or codetermine one or more of the employees’ essential terms and conditions of employment. Essential terms and conditions of employment are:

• wages, benefits, and other compensation;
• hours of work and scheduling;
• the assignment of duties to be performed;
• the supervision of the performance of duties;
• work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline;
• the tenure of employment, including hiring and discharge; and
• working conditions related to the safety and health of employees.

The joint-employer standard will only be implicated if an entity employs the workers at issue and has authority to control at least one of the above terms or conditions. Authority over any other matters is not sufficient.

Unwinding a prior rule issued in 2020, this new rule considers the alleged joint employers’ authority to control essential terms and conditions of employment. The rule focuses on the ability, not the actual exertion of, control; this authority to control is considered even if control is exerted indirectly.  By contrast, the 2020 rule made it easier for actual joint employers to avoid a finding of joint-employer status because it set a higher threshold that a joint employer must actually “possess and exercise . . . substantial direct and immediate control” over essential terms and conditions of employment.

In addition to loosening the standard for control, the new rule also provides extensive guidance to parties regarding their rights and responsibilities when more than one statutory employer employs particular workers and controls (or has authority to control) one or more of their essential terms and conditions of employment.

One thing to keep in mind:

The Board’s final rule is separate from the Department of Labor’s (DOL) joint employer rule. The DOL interprets joint employer status under the Fair Labor Standards Act (FLSA). A joint employer under the FLSA is jointly and severally liable with the employer for the employee’s wages. For example, a joint employer relationship could occur where a hotel contracts with a staffing agency to provide cleaning staff, which the hotel directly controls. If the agency and the hotel are joint employers, they are both responsible for worker protections under the FLSA.

The Board’s new rule deals with the National Labor Relations Act. Therefore, if two entities are joint employers under the Act, both are potentially liable for any unfair labor practices committed by the other and both entities must bargain collectively with the representative of those employees with respect to the employees’ terms or conditions of employment.

So, what about franchising??

The Board explained that the nature of the franchise relationship is incidental to the analysis established by the final rule. In other words, not all franchisors and their franchisees will automatically be joint employers under the rule. Rather, the franchise model notwithstanding, the joint-employer analysis is driven by the alleged joint employers’ relationship with the employees in question and alleged employer’s authority to control one or more of the employees’ essential terms and conditions of employment. The bottom line is that, while the final rule establishes a uniform joint-employer standard, the Board must still conduct a fact-specific analysis on a case-by-case basis to determine whether two or more employers meet the standard.

Effectively, this means that a franchisor may be considered a joint employer over a franchisee’s employees under certain circumstances, and in those instances, both franchisor and franchisee would be responsible to bargain with the union that represents the jointly employed workers, both would be potentially liable for unfair labor practices committed by the other, and both would be subject to union picketing or other economic pressure if there is a labor dispute.

Moving forward, franchisors should avoid controlling and reserving any authority to exert control over any of the essential terms and conditions of employment listed above. For example, franchisors should do the following:

• Minimize control over franchisees’ employees.
• When inspecting a franchise location, do not engage with the franchisee’s employees. Rather, direct all communications to the franchisee (and ensure franchise documents have identified that person to whom franchisor should communicate).
• Enforce operational standards with franchisee, not franchisee’s employees.
• Enforce hours of operation with franchisee, not franchisee’s employees.
• Do not become involved in any manner in the wages, benefits, and other compensation for franchisee’s employees.
• Ensure that franchisees have their own employment applications, letterhead, paystubs, and other employment documents that, if branded, CLEARLY indicate the identity of the employer (Franchisee).
• Ensure that all franchisee job postings CLEARLY indicate the identity of the employer (Franchisee) and not the franchisor’s brand.
• In terms of employee discipline, enforce system standards against franchisee, not franchisee’s employees. Review your franchise agreement to ensure there are no events of default for the franchisee if an employee engages in prohibited conduct.
• Ensure that franchisor training is provided by franchisor to franchisee designates and management. Avoid direct training between franchisor and franchisee’s employees.
• If franchisor offers opening assistance as part of its initial training program, ensure franchisor’s communication is with franchisee, and not franchisee’s employees.
• Do not limit franchisees’ options or make it mandatory that a franchisee use a particular service provider for payroll or HR administrative services; only offer them as optional programs.
• Avoid making the use of certain software applications used for employee management or scheduling mandatory for franchisees.
• Conduct a review of all operating manuals, training materials, recruiting materials, and other communications directed to prospective and existing franchisees and revise them to eliminate language that reads like “top down” control, by avoiding a tone similar to the way in which a supervisor might address subordinate employees. Avoid expressing operating standards in a way that sounds like workplace rules (e.g., “no employee dressed in improper attire may interact with customers”).

There are many other best practices for franchisors to consider to avoid joint-employer status under the new Board rule. Do not hesitate to reach out to our team if you have concerns or additional questions.