New NLRB Advice Memorandum Offers Glimmer of Hope to Franchisors

May 18, 2015

On April 28, 2015, the National Labor Relations Board (NLRB) issued an advice memorandum addressing when franchisors can be considered “joint employers” with their franchisees for purposes of the National Labor Relations Act (NLRA). By concluding that a restaurant franchisor and its franchisee did not constitute a “joint employer” under either the NLRB’s longstanding joint employer standard or the more lenient standard proposed in 2014 by NLRB General Counsel Richard Griffin, the new memorandum provides important guidance to franchisors.

NLRB Joint Employer Background

As we previously reported, NLRB General Counsel Richard Griffin issued a directive in July 2014 that allowed 43 unfair labor practices complaints involving McDonald’s to proceed – against both the franchise employers themselves and against McDonald’s USA LLC as an alleged “joint employer.” In doing so, the general counsel urged the NLRB to depart from its longstanding “joint employer” standard.

Under the existing standard, a franchisor must “share or codetermine those matters governing the essential terms and conditions of employment” in order to constitute a “joint employer.” In contrast, the general counsel has argued for the adoption of a broader “industrial realities” test, which looks to a franchisor’s control over day-to-day operations of its franchises, regardless of whether the franchisor exercises any direct control over the franchises’ employees. The general counsel has explained that the goal of expanding the “joint employer” doctrine is to make franchisors share responsibility for their franchises’ violations of the NLRA.

The new joint employer standard proposed by the general counsel understandably has caused significant concern among franchisors and employers in general. With the applicable standard potentially subject to change, franchisors have not been able to determine potential exposure to franchisee misconduct. In addition, some employers have expressed concern that an expanded NLRB joint employer standard could be used as the basis for expanding the joint employer standard under other employment laws as well, such as the federal Fair Labor Standards Act.

April 28, 2015 Advice Memorandum

The new April 28, 2015, advice memorandum from the NLRB provides some clarity on the new joint employer standard, at least with regard to the general counsel’s position. In the memorandum, the NLRB found that a restaurant chain franchisor, Freshii Development LLC (Freshii), and its Chicago-area franchisee, Nutritionality Inc. (Nutritionality), were not joint employers under either the NLRB’s prior standard or the proposed new “industrial realities” test. In concluding that a joint employer relationship did not exist between Freshii and Nutritionality, the NLRB considered the following key facts:

  • The franchise agreement specifically stated that Freshii “neither dictates nor controls labor or employment matters for franchisees and their employees.”
  • Freshii did not require its franchises to use its sample employee handbook and employment policies.
  • Freshii was not actively involved in its franchises’ point-of-sale systems or scheduling software.
  • Freshii was not involved in the hiring, firing or scheduling of employees in its franchise stores.
  • After a franchise store became operational, franchises were responsible for employee training.
  • Franchises were exclusively responsible for setting employee wages and benefits.
  • Franchises were exclusively responsible for disciplining and discharging their employees.
  • Nutritionality disciplined and discharged employees without consulting Freshii.
  • Freshii had no involvement with Nutritionality’s alleged unfair labor practice and, in fact, remained silent after Nutritionality asked for advice.

In essence, Freshii limited its oversight of Nutritionality to brand quality protection and played no role in Nutritionality’s relationship with and treatment of its employees. Thus, the NLRB reasoned that even under the broader “industrial realities” test, “meaningful collective bargaining between Nutritionality and any potential collective-bargaining representative of the employees could occur in Freshii’s absence,” such that Freshii was not a joint employer.

The April 28 advice memorandum provides a helpful blueprint for franchisors seeking to avoid joint employer status if the NLRB later adopts the general counsel’s position. At the same time, the memorandum is fact-specific, and a great deal of uncertainty remains on this matter since the franchisor-franchisee relationship at issue in the memorandum differs significantly from many franchise arrangements. As we previously reported, the NLRB has sought briefing on significantly expanding the joint employer doctrine as the general counsel urges, and a potentially landscape-altering decision is expected in the coming months. Although franchisors can take some solace in the Nutritionality memorandum, they also should continue to monitor developments from the NLRB closely.

Please reach out to your McGuireWoods contact or members of the firm’s traditional labor team with any questions you may have concerning the April 28 advice memorandum, the NLRA or the NLRB in general.