Federal labor regulators have finally dropped their efforts (for now) to expand franchisor liability for the employment policies and practices of franchisees as the National Labor Relations Board (the “NLRB”) has revealed that it will not appeal a federal court’s decision striking down the NLRB’s October 2023 rule.
For context— historically, there was a clear understanding that franchisors are not the employers of their franchisees or their franchisee’s employees.
In October 2023, this understanding was shaken by the NLRB issuing a final ruling expanding the circumstances in which a franchisor may be deemed a joint employer of a franchisee’s employees, and thus expanding potential franchisor liability for employment claims brought against franchisees.
Prior to the 2023 Rule, the 2020 rule established that joint employer status exists only if a franchisor possesses and exercises “substantial direct and immediate control” over the following essential terms and conditions of employment:
- Hiring
- Firing
- Discipline
- Supervision
- Direction
The 2023 Rule expanded the circumstances in which joint employer status could be established to include indirect control over (or merely reserving the right to control) the following expanded set of essential terms and conditions of employment.
- 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.
For obvious reasons, this created waves in the franchising world as franchisors and their counsel attempted to navigate a new compliance landscape. Language that had historically been acceptable and standard in most every Franchise Disclosure Document would now open franchisors up to joint employer liability under the 2023 Rule.
Fortunately, this uncertainty was short-lived because in March of 2024, a federal court struck down the new rule for its unlawfully broad scope.
Nevertheless, it was widely assumed that the NLRB would attempt an appeal, however, in a surprising turn, the NLRB has announced that it will not appeal the ruling, reverting the joint employer standard back to the 2020 rule in which joint employer status should only be found in the rare instances in which franchisors exert direct control over franchisees employees or the terms of their employment.
While the NLRB has given up for now, this is likely not the end of this story. The NLRB is not pursuing its appeal options, but it may, nevertheless, attempt to come back with a less expansive change to the joint employer rule. In any case, we will continue to monitor and notify our clients of any changes in the law that may affect their franchise systems or the drafting of their Franchise Disclosure Documents.
