In the aftermath of a significant change in the joint employer standard this year, several states are attempting to address how franchisors are affected.

Legislation aims to stop fallout from joint employer status changesIn August, the National Labor Relations Board (NLRB) released a decision in Browning-Ferris Industries of California, Inc. d/b/a BFI Newby Recyclery, 362 NLRB No. 186 (Aug. 27, 2015), drastically expanding the standard for determining whether an entity was a joint employer. (See our blog post about it here). In doing so, the NLRB veered away from precedent that required a showing that a company exerted actual control over the employees of another company in order for the first company to be considered a joint employer.

In the wake of Browning-Ferris, the standard now looks to the control a company could potentially exert over the employees of another company when making the joint employer determination. While Browning-Ferris involved outsourced workers and not a franchise system, the broad holding in the case (as criticized by the dissent) could apply to many scenarios, including the franchisor-franchisee relationship.

While many thought this expansion of the joint employer standard would be a nail in the coffin of franchises, states have reacted to the NLRB’s move by attempting to narrow the focus and revert to the traditional control standard. While Congress failed to act, Michigan, Virginia and Wisconsin are joining states such as Texas, Tennessee and Louisiana, which have already passed legislation to protect franchisors from being considered joint employers. Michigan, Virginia and Wisconsin have all proposed legislation that would similarly impact the franchisor-franchisee relationship.

Michigan legislative activity

In November, the Michigan legislature introduced bills in the Senate and House that would limit a franchisor’s liability to a franchisee’s employees by amending a number of statutes including

  • Workers’ Disability Compensation Act of 1969 (Michigan Senate Bill No. 493);
  • Franchise Investment Law (Michigan Senate Bill No. 492);
  • Michigan Employment Security Act (Michigan Senate Bill No. 5073);
  • Workforce Opportunity Wage Act (Michigan House Bill No. 5072);
  • Michigan Occupational Safety and Health Act (Michigan House Bill No. 5070); and
  • 1978 PA 390 amending section 1, MCL 408.471 (Michigan House Bill No. 5071).

The intent of the proposed legislation in Michigan is to clearly define “employer” and explicitly prevent the franchisor from being held as a joint employer with the franchisee. Much of the language in the bills provides that “except as specifically provided in the franchise agreement, as between a franchisee and franchisor, the franchisee is considered the sole employer of workers for whom the franchisee provides a benefit plan or pays wages.” Michigan Senate Bill No. 493 amending the Workers’ Disability Compensation Act most tellingly describes the state’s attitude towards the expanded standard. It seeks to prescribe the traditional control formula by stating that a franchisee’s employee will not be an employee of the franchisor unless the franchisee and franchisor co-determine matters “governing the essential terms and conditions of the employee’s employment,” and both “directly and immediately control matters relating to the employment relationship.” That bill, along with Senate Bill No. 492, has been sent to the governor for execution.

Virginia legislative activity

Virginia similarly seeks to redefine “employer” and “employee” to prevent the franchisor and the franchisee from being labeled as joint employers. Virginia House Bill No. 18 proposes to amend the definition of “employee” in section 40.1-2 of the Code of Virginia Definitions to read that “neither a franchisee nor a franchisee’s employee shall be deemed to be an employee of the franchisee’s franchisor for any purpose,” absent any contrary agreements in the franchise agreement.

Wisconsin legislative activity

Wisconsin follows in line with Michigan and Virginia in proposed Senate Bill No. 422, which proposes to increase franchisor exclusions for employment law purposes. The act impacts laws relating to workers’ compensation, unemployment insurance, employment discrimination, minimum wage, and wage payments. Again, harking back to the traditional notions of control to hold the franchisor as a joint employee with the franchisee, the Wisconsin Senate Bill prohibits considering a franchisor as the employer of a franchisee or a franchisee’s employee unless the franchisor agrees to that role in writing or exerts “control over the franchisee or the franchisee’s employees that is not customarily exercised by a franchisor for the purpose of protecting the franchisor’s trademarks or brand.”

These bills are an obvious reaction to the NLRB’s August decision, and it is likely that other states will pass similar legislation. It remains to be seen whether such legislation is truly necessary to protect franchisors and franchisees from more intermingling of their businesses than bargained for by either party. The state bills can be juxtaposed with congressional failure to include legislation that would limit the NLRB’s enforcement of the joint employer standard in its latest omnibus spending package. All is not lost in Congress, though, and HR 3459, the Protecting Local Business Opportunity Act, is positively positioned for a vote in 2016. HR 3459 would curtail the NLRB’s expansion of the traditional standard. In contrast to Congress’s current posture, the state bills are a clear indication that many agree with the franchise community at large that the NLRB has taken the joint employer standard too far, as least as it regards the franchise relationship.

For additional information or any questions on your state’s laws, please contact any of the attorneys in our Franchising & Distribution or Employment & Labor practice groups.