NLRB Reverses Decision Targeting Franchises

2015 ruling overturned decades of precedent by holding corporations responsible for franchisee behavior

A sign outside a San Francisco McDonald's
A sign outside a San Francisco McDonald's franchise / Getty Images
December 16, 2017

The nation's top labor board reversed an Obama-era decision targeting franchise businesses, but advocates and legal experts say Congress needs to take action to resolve the issue permanently.

The Democrat-controlled National Labor Relations Board, which oversees union elections and workplace disputes, overturned decades of precedent in 2015 by holding parent businesses accountable for workplace violations committed by franchisees or subcontractors. The Obama board's decision roiled the business community, particularly franchise corporations, which allow small business owners to operate under a company umbrella but do not manage day-to-day workplace policies.

A 3-2 Republican majority returned to the previous standard on Thursday ruling that an employer must exercise direct control over employees in order to be held liable for complaints. The agency said in a statement that reverting to the previous standard was essential to "promoting stability and predictability in bargaining relationships."

"Proof of indirect control, contractually-reserved control that has never been exercised, or control that is limited and routine will not be sufficient to establish a joint-employer relationship," the agency said in a release.

The ruling earned the praise of management-side labor lawyers. Michael Lotito, a veteran attorney at Littler Mendelson, said the board ruling would give employers more certainty over their dealings with employees and rein in an agency that had increasingly gone beyond the letter of the law. He criticized the 2015 NLRB for exceeding its authority to create policy, rather than enforce the letter of the law laid down by Congress in the National Labor Relations Act and Fair Labor Standards Act.

"Agencies are making law that Congress should be enacting," he told the Washington Free Beacon. "What the board did was a very welcome development. What is disconcerting is why [the new ruling] was necessary. … The agency is supposed to be subservient to Congress, accountable to them and they've evolved in a way that is accountable to no one."

Sen. Lamar Alexander (R., Tenn.), chairman of the Senate Committee on Health, Education, Labor, & Pensions, also praised the decision. One of the largest issues facing the new regulatory regime was that franchise corporations would freeze out young entrepreneurs who did not have access to expensive insurance and lawyers in favor of larger, more established employers.

The reversal, Alexander said, would allow smaller players access to the marketplace.

"The Obama NLRB’s decision changing the joint employer standard was the biggest attack on the opportunity for small businessmen and women to make their way into the middle class that anyone has seen in a long time—threatening to destroy the American Dream for owners of the nation’s 780,000 franchise locations," Alexander said in a statement. "Our committee worked to confirm two board members this year with the goal of restoring fairness to the board, and today’s decision by the Board in the Hy-Brand Industrial Contractors case is good news for all Americans."

Matthew Haller, spokesman for the International Franchising Association, said the industry welcomes the change, but wants to go a step further to prevent future regulators from overturning the decision.

The NLRB is a partisan agency by design with its five-member board made up of three members from the president's party and two from the minority. A future board could overturn the Trump majority's decision just as easily as the latter did to the Obama administration approach. Haller said the issue needs to be resolved through legislation that would formally establish the joint employer standard.

"The decision, while important and a huge victory for rationale thought, simply makes the case for Congress to finish the job," he said. "No one wants to have two bosses, and there is still great uncertainty under the FLSA, or under a future NLRB, with respect to joint employment."

Lotitoalso said legislation is necessary given the "radical" shifts in Democrat and Republican appointees in recent years. The agency's approach to precedent would not be enough to give employers certainty unless lawmakers draw a bright line that cannot be spun by ambitious future regulators.

"When the law is constantly shifting, it does not provide the certainty the law is supposed to give," he said. "There's no question that a legislative solution is really the only way to address this."

The ruling came at the twilight of Republican control of the board. In September, the Senate confirmed William Emanuel, Trump's second nominee to the NLRB, giving Republicans control of the board for the first time since 2007. They will briefly lose that majority in 2018 as Chairman Philip Miscimarra, a Republican appointee of Barack Obama, finishes his term, as it could take several months for the Republican-controlled Senate to confirm Miscimarra's replacement.

Published under: NLRB