This Legal Change Could "Severely Disrupt" Franchising. Learn About the PRO Act's Joint-Employer Standard
Industry experts say the PRO Act legislation would dramatically change liability rules.
If someone works the cash register at a local McDonald's, who employs that person? Is it the individual franchisee who owns the McDonald's location, or the McDonald's corporation itself?
That may sound like a wonky question, but it's at the heart of legislation being considered by Congress — and a proposed change could "severely disrupt the franchise business model," according to a coalition of franchise industry groups. This change in the law could make franchising more difficult and expensive, limiting growth and opportunities.
Right now, the answer to the question of who employs the cashier is largely straightforward: An individual franchisee hires and employs anyone who works at the business. That's the long-established way that franchising works.
But the Protecting the Right to Organize Act (or PRO Act) includes a change to language known as "joint employer," which means that, in certain circumstances, the franchisee and the franchisor might both be considered the cashier's employer. The franchisor could be legally on the hook for an individual franchisee's mistakes, or for mistakes made by the franchisee's employees, and may even force a change to the franchisee's own relationship with the franchisor.
The implications are substantial. There are nearly 800,000 franchises in the United States, many of them beloved brands such as McDonald's, 7-Eleven, Ace Hardware, Marriott International and Re/Max. All of them, according to industry and legal experts, could be harmed.
The PRO Act's joint-employer standard has a recent history that dates back to 2015. That's when, under the Obama administration, the National Labor Relations Board ruled on a case involving the waste-management company Browning-Ferris Industries.
The Browning-Ferris ruling held that franchisors with "indirect control" over a contractor or franchisee's workers, or even the potential to exercise such control, could be held responsible for actions taken by franchisees. The ruling meant that if a franchisee, say, failed to pay an employee overtime, then the franchisor—the national brand—could be held legally accountable, even though the national brand had no knowledge of the situation at the franchise. The ruling also meant that the national brand could be forced to legally recognize and bargain with unions, instead of the unions having to organize each franchise location individually.
At the time, union leaders such as the AFL-CIO heralded the Browning-Ferris ruling as a "significant victory." AFL-CIO President Richard Trumka said the decision "may very well signal the beginning of the end of outdated laws that fail to address an economic structure tilted against working people."
The franchise industry saw things differently. The Browning-Ferris ruling was the first time in decades that indirect control had been considered the main determining factor in a joint-employer relationship under the National Labor Relations Act. The International Franchise Association called the decision and the indirect control standard an "existential threat" to the industry as a whole.
According to the IFA, its fears were proved correct. In the four years following the ruling, the IFA says, litigation against franchises nearly doubled—costing the industry $33 billion per year and preventing the creation of 376,000 jobs.
At the end of the Trump administration in 2020, a new rule was issued for determining joint-employer status. This rule restored the pre-Browning standard by stating that joint-employer status only applied under the National Labor Relations Act where a franchisor had "substantial direct and immediate control" of a franchisee's employees.
But that didn't settle the matter. In fact, the situation only became more complicated.
Employer-side law firms celebrated the 2020 rule change, saying it reduced the risk of a franchisor being found a joint employer, thus reducing potential liability and making clear that national brands do not need to bargain with their franchisees' workers.
Trumka, speaking for the AFL-CIO, said the new rule would "allow companies to manipulate the system to limit working people's freedom to negotiate for fair wages and benefits."
Attorneys general in 18 states filed suit, seeking to vacate the new rule, and a federal district court in New York sided with them. A judge struck down a significant portion of the new rule. That case is currently being appealed.
Then, a new administration began in Washington. Shortly after President Biden entered office in early 2021, the U.S. Department of Labor announced its intent to withdraw the Trump-era joint-employer rule—signaling an intent to return to the Browning-Ferris standard of indirect control.
The IFA called the Biden administration's decision "bewildering," given the economic harm that the indirect control standard had caused.
Now, the joint employer issue has become part of the PRO Act, which the Biden administration supports. The law would go further than the U.S Labor Department could, and embed the indirect control standard into the National Labor Relations Act.
In practice, according to leading employer-side attorneys such as Michael Lotito of the Littler Workplace Policy Institute, the PRO Act would put the franchise industry right back in the same situation that the Browning-Ferris decision created. The IFA, the National Franchisee Association and others wrote to Congress in March 2021, saying the PRO Act would "dramatically change liability rules."
That letter noted that these effects would disproportionately harm minority communities, because while only 18% of non-franchise businesses are minority-owned, more than 30% of franchises are minority-owned.
For all these reasons, franchisors and franchise owners would have serious cause for concern about their livelihoods if the PRO Act and its joint-employer standard become federal law.
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