Will the joint-employer ruling destroy restaurant franchising?

After years of debating what defines a joint employer, The National Labor Relations Board issued its final ruling Thursday which National Restaurant Association's Sean Kennedy described as a "heavy blow to small business restaurant operators."

The ruling replaces the NLRB's 2020 rule issued under Republican control and states that "an entity may be considered a joint employer of a group of employees if each entity has an employment relationship with the employees and they share or codetermine one or more of the employee's essential terms and conditions of employment."

"The rule upends employment policy, adopting a far-fetched definition of 'employer' based on 'indirect or potential influence' of an employee and then fails to define how 'indirect control' will count toward a joint employer relationship," Kennedy, EVP for public affairs at the NRA, said in a statement. "Nearly one-third of the restaurant industry operates under a franchisee-franchisor relationship and nearly all restaurants contract third parties for work like laundry or delivery. This means nearly every restaurant operator is now on a crash course to figuring out if they have a joint liability for the host of people working in their establishment. And franchisees are suddenly having to come to terms with losing their independence in the eyes of the NLRB.

Lauren McFerran, the National Labor Relations Board chairman, disagreed, stating the new standard reflected a legally correct return to common-law principles and a practical approach to ensuring that the operators respect bargaining obligations under the NLRA.

"While the final rule establishes a uniform joint-employer standard, the board will still conduct a fact-specific analysis on a case-by-case basis to determine whether two or more employers meet the standard," she said in a press release.

The NRA's statement argued, however, that the move will increase the liability risks of the franchisor-franchisee relationship, as well as service providers and third-party companies.

"This new definition of Joint Employer will create chaos and legal questions across the restaurant industry," according to the statement. "The National Restaurant Association and the Restaurant Law Center will work to help franchisors and franchisees understand their responsibilities while we fight to restore a workable joint employer standard based on the direct and immediate control of their employees."

The future of franchising

Andrew Gruel, founder of Slapfish and American Gravy Concepts in California, said the mandate will destroy franchising in America.

"Why would I franchise a concept if ultimately I am going to be held legally responsible for any labor law violations — even if I am not running the business in any capacity," he said in an email to FastCasual. "At that point, a franchisor might as well run the business if they are taking on the risk by opening it as a company-owned store. Given the lack of access to capital in restaurant markets, this will slow growth significantly as company-owned concepts can't grow as quickly as franchises. This will also prevent franchisees from becoming entrepreneurs as they won't start their own concept and won't have access to successful franchise systems. Small business owners and entrepreneurs are the backbone of the US economy."

Laura Rea Dickey, CEO, Dickey'sBarbecue Restaurants Inc., said the ruling was bad policy, calling itvague and overreaching.

"There isn't a clear, wholistic definition of what 'indirect or potential influence' means towards employees anywhere in the ruling," she said in an interview with FastCasual. "No where is 'indirect control' defined. This alone will costs businesses additional money to attempt to adhere to 'vague concepts' and spend resources rewriting handbooks in a litigious but not meaningful way. This ruling will likely lead to defending against false claims for businesses for something in which there is no 'clear standard definition or explanation'. Vague is in no one's best interest and wastes time, money and resources."

The International Franchise Association agrees with Gruel's view, stating the ruling reduces the independence of franchise business owners, diminishes franchisees' equity in their businesses and forces franchisors to offer less support.

🚨BREAKING🚨: IFA Calls on Congress to Reject @NLRB's Joint Employer Rule. This rule reduces the independence of franchise business owners, diminishes franchisees' equity in their businesses, and forces franchisors to offer less support. Read more: https://t.co/ruQkUebxB9pic.twitter.com/qSvdhuDzKv

— IFA (@Franchising411) October 26, 2023

"This overreaching and unworkable joint employment policy is designed to change the rules in the middle of the game for hundreds of thousands of franchise owners and turn them into middle managers in their own businesses," Michael Layman, IFA senior vice president for government relations and public affairs, said in a statement. "What's worse, we have seen this misguided policy before and it resulted in hundreds of thousands in lost job opportunities, billions in increased costs for franchised businesses, and a doubling of lawsuits."

Franchising is a pathway to entrepreneurship for all Americans, especially women, people of color, veterans, and first-time business owners, according to Layman, who said nearly a third of franchise owners said they would not own their own business without franchising.

"And this attack on the franchise model would shut the door of opportunity to thousands of would-be entrepreneurs," he said. "IFA will use every avenue available to protect franchising from the harm this rule will bring. We urge Congress to stand up for their Main Street constituents against this rogue, Washington agency and reject the NLRB's joint employment rule, including through the Congressional Review Act."

IFA has vowed to stop the rule through any measure available, including through a legal challenge and urging lawmakers for greater oversight of the agency.

Max Sheets, CEO of Chick N Max in Wichita, said he is also worried about the ruling, predicting it will force restaurants to pay entry-level managers at least $55,000 per year, a sum that will seriously task small brands.

"This does not take benefits into consideration, so the real number is probably closer to $65,000," he told FastCasual in an email. "Ten years ago this number was $27,000 then moved I believe to $47,000, brought back to $35,000 and now is $55,000. This will be tough on small businesses and put more pressure on us as an industry."

Dickey said the ruling will hurt franchisors and franchisees as well as small businesses that rely heavily on subcontractor relationships because instead of cleanly defining a standard it erases the line defining a relationship without redrawing a clear new one.

"Perceived liability will limit hiring and slow business, that ultimately causes needless delays and leads to cost inflation," She said.