Franchise Alchemy

Federal Labor Officials Step Into the Lion’s Den

Lions Den

Originally posted on 10/22/2015, content updated on 11/03/2023

Two top federal labor officials engaged in a spirited dialog with two franchise lawyer moderators at the American Bar Association’s annual Forum on Franchising in New Orleans on October 16, 2015.  The topic: whether the National Labor Relations Board (NLRB) will fundamentally change the franchise industry.

The program had dramatic potential.  Then-NLRB General Counsel Richard Griffin and Dr. David Weil, then-Administrator of the Wage & Hour Division of the U.S. Department of Labor, faced a lion’s den of more than 800 lawyers representing franchisors and franchisees, none of whom wanted to see franchisors deemed to be joint employers of franchisee employees.

Yet the presentation was substantive and enlightening.  The labor officials came across as intelligent, thoughtful, articulate and intent on enforcing the law.  They were not doctrinaire, and they even expressed their appreciation for franchising as a business model.  The program gave the officials an opportunity to explain why joint employment is an important tool in general and in the franchise context.

Eric Karp, a litigator who represents franchisees and franchisee associations, said that application of the joint employer standard to franchise systems across the board would have a serious disruptive influence on the risk and reward balance in the franchise relationship.  Franchisees see themselves as being much more than mere intermediaries.  On this issue, he said franchisees and franchisors are completely on the same page.  No franchisee wants the franchisor to be the joint employer of their employees.  They don’t want or need that level of interference in their relationships with their employees.   The good news is that both officials indicated that they also have no intention of making all franchisors joint employers.

Setting franchising’s historical context, Jonathan Solish noted that trademark licensing was not permitted until the passage of the Lanham Act in 1946.  Before that, trademark licensing was considered a deceptive trade practice.  Licensors risked abandonment of their marks and were not able to collect royalties.  Licensing today is a central element of franchising, which is an important sector of the U.S. and world economy.  But licensing requires the trademark owner to exercise substantial control over the licensed products.    Joint employment becomes an issue when the franchisor’s control extends to the franchisee’s workers.

Richard Griffin noted that some franchisors do exercise more control than necessary to protect the brand.  He said that the joint employment cases in franchising should not be viewed as an attack on the franchise model.  He compared it to piercing corporate veil, which does not mean that corporate limited liability is meaningless.  It just means that liability arises under certain fact patterns.

Richard GriffinMr. Griffin said that the NLRB has no independent investigatory authority.  It cannot target anyone.  The agency relies on parties filing unfair labor charges to initiate their proceedings.  The role of the NLRB is to safeguard employees’ rights to organize and to determine whether to have unions. The agency also seeks to prevent and remedy unfair labor practices by employers and unions.

Dr. David Weil noted that the Wage & Hour Division is an independent agency that can initiate investigations.  Its mission is to enforce the most fundamental labor standards: minimum wages, overtime and child labor laws; and to ensure compliance with these statutes in workplaces throughout the U.S.

In his book, The Fissured Workplace, Dr. Weil explained the trend in recent decades in which companies have focused on their core competencies while contracting out to others much of the work that was formerly done by company employees.  Contractors provide these services among others: janitors, security guards, payroll administrators, information technology specialists, drivers for package delivery companies and tower workers for cell phone service companies.  This trend has resulted in lower wages by outsourced workers and less compliance by outsourcing suppliers than when the lead company is the employer.  In his book, he devoted an entire chapter to franchising.

Dr. David WeilMr. Griffin cited the changed nature of the workplace described by Dr. Weil as a reason for the change in the joint employment standard articulated in the Browning-Ferris case.  Both Mr. Griffin and Dr. Weil pointed out that joint employment is a well-established principle of labor law.

Eric Karp noted that McDonald’s is one of the few franchisors that own the real estate of the franchised businesses.  He asked Mr. Griffin how important control of real estate is.  While saying that he won’t litigate McDonald’s case in public, Mr. Griffin said that a property owner can engage in certain conduct relating to the property that non-owners cannot.  A property owner has the authority to call the police to stop trespassing.  An owner might take this approach to stop a labor demonstration on the property.  Or a property owner might call security to remove a picketer.  This type of activity goes well beyond brand control.

Mr. Karp also asked about technological advances.  Mr. Griffin said that if a franchisor requires a franchisee to use a scheduling system that includes gross sales and labor costs, it might include an algorithm that provides a warning when labor costs exceed a specified percentage of sales.  This can lead the franchisee to send people home or take them off the clock.  If the franchisor checks to make sure franchisees abide by these protocols, then this can be a problem.

Jon Solish asked whether adding the franchisor as additional insured on an employer liability insurance policy is an issue.  Mr. Griffin said that this could be evidence of the franchisor’s own view that it is a joint employer.

Addressing Dr. Weil, Eric Karp noted that studies Dr. Weil cites show that in systems that include both company and franchise locations, franchisees have a higher likelihood of wage and hour violations than company locations.  In Mr. Karp’s view, this disparity is chiefly the result of fact that franchisees have less access to HR expertise.  Franchisors get lots of HR questions from franchisees, but may now withhold assistance out of their fear of joint employment liability.  He asked whether there might be a less disruptive way of getting compliance without resorting to the joint employer model.

Dr. Weil responded by saying that both the government and franchisors have a common interest in franchisee compliance with labor laws because the worst actors can undermine the brand.  As an example, he cited the recent charges brought by the New York Attorney General’s Office and the U.S. Department of Labor against a Papa John’s franchisee.

Dr. Weil also cited the 2013 collaboration between the Wage and Hour Division and Subway.  Facing a large number of violations by franchisees, Subway corporate reached an agreement with the Wage and Hour Division to establish a working relationship to educate franchisees on how to comply with the law.  If a franchisee obstructs Wage & Hour’s work, the Division alerts Subway corporate and they assist.  This is not joint employment.  The goal is simply to increase compliance.

Tom Pitegoff,