It’s 2015: Do You Know Who Your Employees Are? The NLRB’s New Expanded Joint Employer Standard

09/10/2015

On August 27, 2015, the National Labor Relations Board (“NLRB” or the “Board”) issued its decision in Browning-Ferris Industries of California, Inc., upending decades of well-settled precedent to establish a new, broad standard for determining when two entities are “joint employers” under the National Labor Relations Act. 362 NLRB 186 (2015). This long-anticipated decision—issued by a three-member majority with two members dissenting—holds that an entity may be a joint employer of another entity’s workers based solely on reserved or indirect control over those workers’ terms of employment, even if that reserved or indirect control is attenuated or never exercised at all. The Board’s new expansive and ambiguous test has significant potential implications for businesses using contracted or outsourced employees, and may have significant implications for franchisors, who are also in the NLRB’s crosshairs in cases like the hotly contested McDonald’s, USA, LLC litigation.

Background and Holding

Browning-Ferris arose from a contested union election involving Leadpoint Business Services, a staffing firm that supplied employees to Browning-Ferris Industries of California, Inc. (“BFI”). Applying the NLRB’s traditional joint employer standard, an NLRB Regional Director found that Leadpoint was the sole employer of the employees seeking to unionize. The NLRB then granted the union’s request to review that decision, and explicitly asked the parties and other interested entities to submit briefing regarding whether it should adopt a new joint employment standard. The Board then articulated this new standard in Browning-Ferris, which itretroactively applied to find BFI to be a joint employer with Leadpoint.

The Board’s new joint employment test is a two-step inquiry. The Board will first determine whether a common-law employment relationship exists between the putative joint employer and the workers at issue. According to the Board, a common law employment relationship exists where an individual is employed to perform services in the affairs of another person or entity and is subject to that person or entity’s control with respect to how those services are performed, whether or not that control is indirect or not exercised. This focus on indirect control is a marked departure from the Board’s previous standard, which required a joint employer to not only have control in theory, but also to exercise it in a direct and substantial fashion.

If the Board majority’s version of the common-law employment test is satisfied, the Board will then look to whether the putative joint employers “share or codetermine those matters governing essential terms and conditions of employment.” In explaining this new standard, the Board majority emphasized its intent to apply this test to as many employment relationships as possible, and noted that “essential terms and conditions of employment” not only include well-settled items such as hiring, firing, discipline and supervision, but may also include more indirect or less obvious terms such as “dictating the number of workers to be supplied; controlling scheduling, seniority, and overtime; and assigning work and determining the manner and method of work performance.”

Joint Employment Factors Considered in Browning-Ferris

In addition to its general comment that “determining the manner and method of work performance” may indicate a joint employment relationship, the Board cited the following aspects of Leadpoint’s and BFI’s relationship to find that, under the Board’s newly expanded test, BFI was a joint employer with Leadpoint:

  • Hiring: Although BFI did not recruit, interview, test or select Leadpoint personnel, BFI had the right to require that applicants take and pass drug tests and that Leadpoint personnel have appropriate qualifications, certification, and training. BFI also retained the right to reject any Leadpoint applicant. 
  • Discipline and Termination: BFI had the right to “discontinue the use of any personnel for any or no reason.” The Board also cited two instances in which BFI managers “request[ed] the[] immediate dismissal” of Leadpoint employees due to their misconduct. Both times, Leadpoint officials removed the employees from their duties and terminated their employment after conducting its own investigation. Although BFI managers were not involved in the termination decisions, the Board held that “the outcome was preordained by BFI’s ultimate right under the terms of the agreement to dictate who works at its facility.”
  • Compensation: Leadpoint’s agreement with BFI prohibited it from paying its employees more than BFI paid its employees for comparable work. The Board also emphasized that BFI compensated Leadpoint for labor costs on a cost-plus basis, but noted that such an arrangement “is not necessarily sufficient to create a joint-employer relationship.” (Emphasis added)
  • Supervision: Leadpoint supervisors were on-site to directly supervise Leadpoint employees, but BFI controlled the hours and production lines in the facility. BFI also required that Leadpoint employees obtain a signature from a BFI representative attesting to their hours worked, and retained the right to refuse payment to Leadpoint for any time which was not confirmed by a BFI representative.

While some of these factors may be present in some franchisor-franchisee relationships, many would be unusual in the franchise context, including labor cost reimbursements and direct involvement in the hiring and supervision of another entity’s employees. As discussed below, franchisors should keep these possible distinctions in mind as this issue continues to develop.

Implications for Franchisors

As discussed in our previous alert, the NLRB’s General Counsel Richard Griffin submitted briefing in Browning-Ferris advocating a broad definition of joint employment that would deem an entity a joint employer based on its “direct or indirect control over working conditions, . . . the unexercised potential to control working conditions, or where ‘industrial realities’ otherwise made it essential to meaningful [collective] bargaining.” This briefing was widely viewed as providing insight into the General Counsel’s position in the highly-watched McDonald’s cases, in which he alleges that franchisor McDonald’s, USA, LLC is a joint employer with its franchisees. Many of the consolidated McDonald’s cases are still working their way through the NLRB’s litigation process, but Browning-Ferris may provide some clarity regarding whether and how the Board will apply its new standard in the franchise context.

Many of the factors considered by the Board in Browning-Ferris may be present in some franchisor-franchisee relationships, making this decision a cause for concern. However, the Board’s decision also emphasizes the obvious fact that the staffing agency/user firm business model is distinguishable from the franchisor/franchisee context. Additionally, portions of the majority’s decision take pains to avoid sweeping pronouncements that might be applied to franchisors. While franchisors should certainly continue to monitor these developments, the narrow scope of Browning Ferris, as well as a recently issued advisory opinion from the NLRB’s Division of Advice, may provide some guidance and best practices until the Board tackles this issue in the McDonald’s, USA, LLC litigation (if it is not resolved before then).

Browning-Ferris’s Narrow Scope

The first ray of hope—or at least the first sign that the NLRB may not be inclined to mechanically apply Browning-Ferris in the franchise context—is apparent in the Board majority’s response to the two members who dissented from their opinion. The dissent cited Patterson v. Domino’s Pizza, LLC, a California Supreme Court case holding that Domino's was not vicariously liable for wrongdoing by a franchisee's employee because Domino's did not retain or assume a general right of control over day-to-day aspects of employment for the franchisee's employees. 333 P.3d 723, 740 (Cal. 2014). The Board majority disagreed with the dissent’s reliance on this case, noting that Patterson relied on precedent under the California Fair Employment and Housing Act and “addressed the particularized features of the franchisor/franchisee relationships, none of which are present here.” (Emphasis added). The Board majority echoed this point in another footnote, noting that although the dissent argued that the majority decision altered the law with respect to franchisor-franchisee relationships, “none of those decisions are before us today.” (Emphasis added). These acknowledgements, combined with the fact-specific nature of the Board’s inquiry under its new test, may open the door for franchisors to distinguish their business relationships from those present in Browning-Ferris.

Freshii’s Advice Memorandum Points to Possible Distinctions for Franchisors

An advice memorandum regarding a Freshii franchisee issued by the NLRB’s Division of Advice on April 28, 2015 may provide further guidance. Nutritionality, Inc. d/b/a Freshii, NLRB Div. of Advice, No. 13-CA-134294, April 28, 2015 (released May 11, 2015). The Division of Advice, which reports to the Board’s General Counsel, concluded in this memorandum that neither franchisor Freshii Development LLC nor a franchise development agent were joint employers with a Freshii franchisee that was accused of firing two employees for trying to unionize their workforce. This memorandum is not binding and applied the Board’s traditional joint employer test, which the Board overturned in Browning-Ferris. Nevertheless, it provides useful guidance for factors that may demonstrate that a franchisor does not share or codetermine terms and conditions of employment for its franchisee’s employment, which remains a relevant inquiry under Browning-Ferris. The Division of Advice concluded that Freshii did not share or codetermine terms and conditions of employment based on the following factors:

  • Freshii played no role in its franchisee’s hiring, firing, disciplinary or supervisory decisions; 
  • Freshii did not determine wages, raises or benefits for franchisee employees; 
  • Freshii did not participate in scheduling decisions or determine work hours; 
  • Freshii offered its franchisees operations manuals, but most sections, other than recipe and décor instructions, were advisory and not mandatory; 
  • Monthly reviews by Freshii’s development agents were limited to inspecting franchisees’ adherence to Freshii’s brand standards, particularly those regarding menu and food products, and were not used to examine employment-related policies.

The Browning-Ferris majority echoed the Division of Advice’s emphasis on the need for businesses to protect their brands, clarifying that its new standard “do[es] not suggest . . . that a putative employer’s bare rights to dictate the results of a contracted service or to control or protect its own property constitute probative indicia of employer status.” Similarly, as noted by the dissent, even the General Counsel’s briefing argued that the Board “should continue to exempt franchisors from joint employer status to the extent that their indirect control over employee working conditions is related to their legitimate interest in protecting the quality of their product or brand.”

While the fact-specific inquiry required under Browning-Ferris precludes a mechanical application of this exception to all franchisors, the Board’s and General Counsel’s acknowledgement that it is possible for an entity to protect its brand without becoming an employer may provide some comfort to franchisors who limit their involvement in franchisee operations accordingly.

Next Steps

It remains to be seen whether BFI will appeal the Board’s decision. Whether or not an appeal eventually goes forward, additional litigation is likely to result from Browning-Ferris, including whether and how it should apply to franchisors. In the meantime, we will continue to monitor this rapidly developing issue and provided updated recommendations as it continues to develop before the NLRB and the courts.

For more information, please contact:

Dean J. Schaner
713.547.2044
dean.schaner@haynesboone.com

Deb Coldwell
214.651.5260
deborah.coldwell@haynesboone.com

Rob Lauer
512.867.8505
rob.lauer@haynesboone.com

Alex Stevens
214.651.5475
alex.stevens@haynesboone.com


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