The U.S. National Labor Relations Board (NLRB) issued a ruling in a recent Browning-Ferris Industries case that, if consistent with an upcoming ruling in a McDonald’s case, could drastically change the franchise industry in the U.S. and Canada.
In the Browning-Ferris case, the NLRB ruled joint employer status could be established where a larger party reserves the authority to control employment, either directly or indirectly through a third party, even if control is not exercised. According to Canadian franchise lawyer Chad Finkelstein, this ruling defies the historical definition of ‘joint employer status’ and creates a hole in the legal relationship between franchisors and their franchisees’ employees.
The NLRB wants a franchisor to be considered a joint employer of its franchisees’ staff and therefore be liable for the employment practices and relationships between the franchisees and their employees. This is why it has also filed complaints against McDonald’s dealing with workers’ rights violations—it says the head office is liable for mistreatment. If the ruling in this case is the same as Browning-Ferris, Finkelstein says, it could reshape the entire franchise model.
In the franchise business model, a franchisor must maintain a considerable degree of control over franchisees’ operation methods, as those who buy a franchise get to leverage the goodwill associated with the franchisor’s trademark and branding. Federal trademark law in both Canada and the U.S. mandates that for a trademark licence to be valid, a licensor is required to exercise a certain amount of control over the quality of goods and services associated with the trademark. Therefore, to maintain ownership over the licensed trademarks, a franchisor must exercise control over how franchisees operate their business.
According to Finkelstein, an attractive feature of the franchise model is how franchisees are independent business owners operating under an established or emerging brand, using the back-office support and purchasing power of a large franchise system, while maintaining control over the daily operations, including hiring. If a franchisor can be deemed a joint employer of its franchisees’ staff, however, franchisors could be burdened with liabilities from franchisees’ relationships with employees and the employees may be able to impose collective bargaining on franchisors. This could result in brand owners reconsidering franchising at all.
Finkelstein says both Canadian and American franchisors should review their franchise agreements to ensure no inference can be extracted requiring operating standards to extend to matters of employment and no such practices are being employed by in relation to their franchisees.