2015 LEGAL OUTLOOK FOR FRANCHISORS: THE NLRB JOINT EMPLOYER DECISION AND

HOW IT AFFECTS YOU

The NLRB Joint Employer Decision: A Potential Blow to the Free World or a Manageable Impact for Franchisors

Presented by Charles N. Internicola National Franchise Lawyer and the President of Thoughts Are Things

Franchising, LLC (franchisor of the ECOMAIDS franchise system)

¡  Federal agency governed by a board of 5 members and a general counsel

¡  Board appointed by the President of the United

States ¡  Generally comprised of a polit ical configuration

that typically reflects views of the President ¡  Possesses the jurisdiction to investigate and

adjudicate cases involving unions and unfair labor practices.

WHAT IS THE NATIONAL LABOR RELATIONS BOARD (NLRB)?

¡  2014 – Fast food workers organized protests and campaigns about their wages.

§  Mainly McDonald’s employees

protesting about higher wages and right to organize

§  Supported SEIU (Service

Employees International Union)

¡  In response, NLRB investigated if McDonald’s engaged in unfair labor practices.

THE JOINT EMPLOYER DECISION: WHAT THE NLRB DECIDED ABOUT MCDONALD’S

¡  NLRB did not just proceed against the McDonald’s “Franchisee” owners who were directly involved in the alleged labor violations.

¡  NLRB also proceeded against McDonald’s corporate – the “Franchisor”.

¡  NLRB held McDonald’s corporate, the Franchisor, to be a joint employer.

¡  Hearings are scheduled for March, 2015.

THE JOINT EMPLOYER DECISION: WHAT THE NLRB DECIDED ABOUT MCDONALD’S

¡  This “Joint Employer” Decision: § Was made by a 5 member board §  Conflicts with decades of contract law and case law. §  Establishes a precedent that franchisors may be responsible for

actions of franchisees. § Will be cited as precedent in a multitude of cases that go beyond

labor union rights. §  Creates tremendous legal uncertainty.

WHY THIS IS SO SERIOUS

¡  Consider that: §  Franchising is a contractual relationship defined by a franchise

agreement;

§  A franchisee obtains the license and right to utilize a franchisor’s brand and system;

§  The franchisee – after signing a franchise agreement – uses his or her own capital to establish the franchise location that he or she directly manages;

§  The franchisee owns the franchised business and one of the assets

that he or she possesses are the rights granted into the franchise agreement;

FRANCHISING AS WE KNEW IT: NOT A JOINT EMPLOYER?

§ The franchisee hires and pays employees and determines who her or she hires, who to promote, and who to give raises to;

§ The franchisee is the known employer as to both state and federal employment taxes; and

§ The franchisee is the employer; the franchisor is not.

FRANCHISING AS WE KNEW IT: NOT A JOINT EMPLOYER? (CONTINUED)

¡  NLRB decided not only is the McDonald’s franchisee an employer, but that McDonald’s corporate was also an employer – a joint employer .

¡  This means the franchise company is responsible and liable for the employment decisions of its franchisees.

THE JOINT EMPLOYER DECISION: WHAT THE NLRB DECIDED ABOUT MCDONALD’S

“Our investigation found that McDonald’s USA LLC [the franchisor] , through its franchise relationship and its use of tools, resources, and technology, engages in suf f icient control over i ts franchisee’s operations, beyond protection of the brand, to make it a putative joint employer with i ts franchisees, sharing l iabi l i ty for violations of our Act…”

¡  You may become jointly responsible for labor violations of your franchisees.

¡  Undermines and unsettles the entire foundation of the franchising business model.

¡  Creates uncertainty and potentially negates thousands upon thousands of existing franchise agreements that are relied upon by business owners throughout the country.

HOW THE NLRB DECISION MAY IMPACT YOUR FRANCHISE SYSTEM AND WHY THIS COULD BE A DEVASTATING BLOW

¡ Where does this Decision end? Is it used as precedent by plaintif fs lawyers to argue in state and federal courts that: §  A franchisor is responsible for employee claims involving sexual

harassment or discrimination? §  A franchisor may be responsible for a franchisees failure to remit

payroll taxes? §  A franchisor is responsible for a franchisees failure to properly

calculate and pay overtime?

HOW THE NLRB DECISION MAY IMPACT YOUR FRANCHISE SYSTEM AND WHY THIS COULD BE A DEVASTATING BLOW (CONTINUED)

If Political Climate Does Not Change, Franchisors Must Adapt. But How?

§ OPTION 1: Exert More Control Over the Franchisee

§ OPTION 2: Exert Less Control Over the Franchisee

§ OPTION 3: Wait It Out and Hope For the Best

HOW SHOULD FRANCHISORS RESPOND?

¡  Create pol icies where you exer t complete control over Franchisee employment pol icies and practices?

¡  This decision wil l require franchisors to potential ly take a defensive posit ion and take over and exer t control over a franchisee’s employee decisions and management.

¡  This wil l increase costs as the franchisor wil l be required to micromanage the franchisee’s operations

OPTION 1: EXERT MORE CONTROL

Pros Cons

+ You “may” avoid future employee claims

- Time Consuming; - Expensive; - Dangerous: May subject you to more liability i.e., discrimination, etc.

¡  Create clear policies in your operations manual and disclosures in your FDD where your legal counsel specifically disclaims control over the employer / employee relationship. §  EXAMPLE: Franchisee expressly acknowledges and agrees that

franchisee is exclusively responsible for managing all employment relationships of the franchise business. This means that, among other things…

OPTION 2: EXERT LESS CONTROL

Pros Cons

+ May serve to protect against “Joint Employer” liability

-  May create more problems with poorly managed franchise locations;

-  Is not a guarantee to avoid liability; -  May be premature

?

OPTION 3: WAIT IT OUT AND HOPE FOR THE BEST

Pros Cons

+ An easy response -  You may become a “sitting duck” especially at state and local levels if judges adopt NLRB decision as precedent

WHO THIS HELPS AND WHO THIS HURTS

Who it Helps Who it Hurts

•  Labor Unions •  Plaintiffs lawyers who sue for wage

and labor violations

•  Franchisor •  Franchisee •  Customers (higher cost) •  Employees

DANGER: Biggest danger to small franchise systems is if this establishes precedent and opens the door to a multitude of “joint” franchisor / franchisee liability.

¡  Absolutely an attack on the franchise business model. The motivation is to benefit and grow labor unions, however the impact and damage may be for greater.

¡  Other Attacks: Similar issue or pretext (“fair wages”) but dif ferent approach – Seattle minimum wage laws that discriminate against franchisees for larger franchise systems.

IS THIS AN ATTACK ON FRANCHISING AND WILL MORE BE COMING?

QUESTIONS?

2015 LEGAL OUTLOOK FOR FRANCHISORS: THE NLRB JOINT EMPLOYER DECISION AND

HOW IT AFFECTS YOU The NLRB Joint Employer Decision: A Potential Blow to the

Free World or a Manageable Impact for Franchisors

Presented by Charles N. Internicola National Franchise Lawyer and the President of Thoughts Are Things

Franchising, LLC (franchisor of the ECOMAIDS franchise system) cni@businessandfranchiselaw.com • (718) 979-8688