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'Not What Anybody Signed Up For': A Legal Expert Weighs In on the Labor Rule That Could Destroy Franchising 'Entrepreneur' spoke to labor attorney Jim Paretti to unravel the status of each of the legal challenges to the expanded Joint Employer Rule — and find out what comes next.

By Carl Stoffers Edited by Jessica Thomas

Key Takeaways

  • The NLRB's expanded Joint Employer Rule holds franchisors jointly responsible for the labor practices of their franchisees.
  • Industry groups have raised multiple legal challenges against the expanded rule.
  • If the expanded rule goes into effect, it will fundamentally alter the franchise business model.

Some form of the Joint Employer Rule has existed for years, but in 2023, the NLRB expanded it in a way that directly impacted the franchise industry. The expanded rule would impact franchising by broadening the definition of joint employment, potentially making franchisors liable for employees they don't directly employ or manage.

Since last year, several groups have challenged the expanded rule, mainly a coalition of business organizations led by the International Franchise Association (IFA). Entrepreneur spoke with attorney Jim Paretti of labor relations law firm Littler Mendelson to find out the status of each challenge, what comes next and what the franchise industry might look like if this rule is ultimately implemented.

Related: Considering franchise ownership? Get started now to find your personalized list of franchises that match your lifestyle, interests and budget.

First, let's start with the Congressional Review Act. On May 3, President Biden vetoed the bipartisan resolution.
I think, with the president's veto, the Congressional Review Act resolution is effectively a dead issue at this point.

Then there's the suit brought by the IFA coalition in the Eastern District of Texas. The coalition initially won that case, correct?
Correct. From our view, it was an excellent decision, not just because we won, but it was a very well-reasoned, point-by-point, detailed legal analysis from the judge.

Related: The New Joint Employer Rule Will Crush Franchising As We Know It. Here's What You Can Do to Protect Your Business.

Now that the NLRB has appealed that decision to the Fifth Circuit Court of Appeals, what happens next?
We'll brief it back and forth, and there will more than likely be oral arguments. Then, the Fifth Circuit will arrive at a decision either upholding the lower court in whole, in part or not [upholding it].

Is the appeal heard by a single judge or a panel of judges?
It will be a three-judge panel. Afterward, generally speaking, if you have a three-judge panel in the appeals court, the losing party can usually ask for the full appeals court, which might be 17 or more judges, to rehear the case en banc. That's fairly unusual but always a possibility.

Related: The Rule That Would've Crushed Franchising Was Just Struck Down — But the Fight Isn't Over.

Once that final appeal decision is issued, does the losing party have any recourse?
The next step would be if someone wanted to file a petition in the U.S. Supreme Court asking to review the decision of the Fifth Circuit. And that's not a right, remember, that's permissive. That's only if the Supreme Court wants to give the review.

Then there's the SEIU case that was filed in the Washington, D.C. appeals court.
Yes, they filed directly in the Circuit Court of Appeals for the D.C. circuit. The coalition in the Texas case intervened, and we've moved to dismiss on the grounds that the court of appeals does not have original jurisdiction over a challenge of this sort. That's where that case is currently sitting. The D.C. Court of Appeals is trying to decide whether or not to dismiss the case for the lack of jurisdiction.

Related: This New Government Rule Threatens to Disrupt the $825 Billion U.S. Franchise System

The expanded rule is obviously dangerous for the entire franchise industry. Who benefits from it?
Organized labor has long pushed for a very broad joint employer standard. With respect to franchising, the issue is, say you want to organize workers at Franchise X. If you want to organize site-by-site, that's not an easy process. It takes a lot to go franchise-by-franchise. What they would like is to have the franchisor be a joint employer [and] have to sit at the bargaining table and negotiate for a slew of stores and come to some agreement with the national franchise. So that's why it's a very high priority for the unions.

Let's say the IFA coalition wins in the Eastern District of Texas and in D.C. Can the NLRB try to do this again at some point?
The short answer is that the board can keep trying to write a rule. They can go back to the drawing board, try again and write something more narrow.

Related: President Biden Just Vetoed a Franchise-Saving Resolution — Here's What You Can Do to Protect Your Business

What does franchising look like if the expanded rule is put into place?
If I'm a national franchisor, I have two options. One is to completely back off as far as I possibly can — which really is the opposite of what you want from a franchisor — leaving the franchisees in the lurch.

Or, alternately, I am going to come down with a hammer. If any amount of control is going to make me liable, then I'm going to exert a lot of control over each franchise, and maybe I do get into the day-to-day operation, which suddenly means the franchise owner — the independent entrepreneurial business owner — goes from being their own boss to being, essentially, a glorified middle manager. That's not what anybody signed up for when they bought a franchise.

In uncertain times like these, what can franchisors do to protect themselves?
As a practical matter, every franchisor should consider if they are exerting the requisite amount of control needed to maintain the franchise without exerting too much control. Because, even under the [Trump-era rule], which we think is a very good and reasonable rule, if a franchisor tries to run the day-to-day operations of a franchise, it may be considered a joint employer. So look to your agreements and examine your practices. Are you doing enough to ensure you're maintaining brand standards while not doing so much that you trip into day-to-day control?

Carl Stoffers

Entrepreneur Staff

Senior Business Editor

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