NLRB Issues Advice Memo Finding That Franchisor Is Not Joint Employer

May 13th, 2015

On April 28, 2015 the National Labor Relations Board (“NLRB”), Office of the General Counsel, issued an Advice Memorandum to the NLRB’s Chicago area regional office finding that a restaurant franchisor and its Chicago area development agent are not joint employers with a Chicago franchisee. This is an important development in light of the current pursuit by the NLRB’s General Counsel of joint employer cases against McDonald’s Corporation.

The Advice Memo, in the case of In Re. Nutritionality, Inc. d/b/a/ Freshii, involves a union organizing effort at a Freshii “fast casual” restaurant owned in Chicago by single unit franchisee. The franchisee terminated employees who were attempting to organize a union for the employees of the restaurant. The Region requested advice as to whether franchisor Freshii Development, LLC (“Freshii”) or its development agent for the “Chicagoland” region is a joint employer.

The essential thrust of the Advice Memo is that Freshii’s control over the franchisee’s operations, as implemented through the development agent, “are limited to ensuring a standardized product and customer experience, factors that clearly do not evince sharing or codetermining matters governing the essential terms and conditions of employment.” While this was a sufficient conclusion under the NLRB’s current “joint employer” standard, the Advice Memo held that even under the more inclusive “industrial realities” standard advocated by the General Counsel in the McDonald’s cases, Freshii and the development agents are not joint employers.

The Facts That Determined The Outcome

Freshii’s franchise agreement expressly disclaims any involvement in the franchisee’s employment or labor relations practices. More specifically, while the franchisee must comply with “System Standards,” on pain of potential termination if it fails to cure a breach of the standards within 30 days of receiving a default notice, the franchise agreement, “the franchise agreement specifies that System Standards do not include ‘any personnel policies or procedures or procedures,’ which Freshii may make available for franchisees’ optional use, and that the franchisee alone will ‘determine to what extent, if any, these policies and procedures might apply’ to its restaurant operations.”

While Freshii’s Operations Manual contains advice on human resources, such as hiring and scheduling employees, how to calculate “labor cost percentage” and how to project labor costs in scheduling, all of this falls in the realm of training and the franchisee is free to accept or reject the advice. While Freshii provides a sample employee handbook, many of its franchisees (including the development agent) obtain other handbooks containing different employment policies.

The development agent provides extensive training to the franchise owner before store opening, and some direct training to the restaurant’s staff around the grand opening, but thereafter the franchisee is solely responsible for training and supervising its staff. The development agent conducts monthly store inspections and also informally “drops by” Freshii restaurants to monitor things like whether the employees are wearing uniforms, store cleanliness, and food preparation, and provides reports to both the franchisee and the franchisor if there are deviations from standards. On one occasion the development agent told a different franchisee that there were too many employees working during a slow time of day, but the franchisee was not required to change its scheduling policies.

While Freshii has a section of its website where prospective employees can apply for a job at a specific location, the only thing Freshii does with the information is forward it to the franchise owner. The franchisee exclusively decides who to hire as its employees.

Freshii has no standard software to monitor employee scheduling or labor costs. This is a substantial difference from the facts alleged in the McDonald’s cases. Individual franchisees are exclusively responsible for setting employee wages and benefits, and the complaining employees (and the union sponsoring them) were unable to produce any evidence that franchisees need to consult with Freshii or the development agent to grant wage increases, decreases, or changes to benefits.

While the development agent can raise an issue about an employee’s performance in a review, there was no evidence that any employee had ever been disciplined or discharged by a Freshii franchisee because of a development agent’s comments. By contrast, Nutritionality (the franchisee) has disciplined and discharged employees without consulting Freshii or the development agent.

Finally, and most pertinently, the evidence was that when the union began to organize at Nutritionality’s store, Nutritionality’s owner told the development agent about it. The development agent did not respond but reported it to Freshii, and neither Freshii nor the development agent communicated with Nutritionality about the organizing effort.

Legal Conclusions

Under the NLRB’s existing standard, the alleged joint employer “must meaningfully affect matters relating to the employment relationship such as hiring, firing, discipline, supervision and direction.” Since neither Freshii nor the development agent has any meaningful impact over Nutritionality’s hiring, compensation, scheduling, discipline, or ongoing supervision, the conclusion that they are not joint employers was self-evident.

Under the standard proposed in the McDonald’s cases and in a case pending against Browning-Ferris Industries of California, the NLRB would examine “the totality of the circumstances, including the way that separate entities have structured their commercial relationship,” to determine whether “the putative joint employer wields sufficient influence of the working conditions of the other entity’s employees such that meaningful [collective] bargaining could not occur in its absence.” This is referred to as the “industrial realities” test. Even under that relaxed standard, the Advice Memo states, “[B]ecause Freshii does not directly or indirectly control or otherwise restrict the employees’ core terms and conditions of employment, meaningful collective bargaining between Nutritionality and any potential collective bargaining representative of the employees could occur in Freshii’s absence.”

Take Away

By finding that they are not, the effect is that the unfair labor practice claims against the franchisor and development agent will be dismissed. This obviously does not suit the agenda of the union conducting the organizing drive, since it wants to organize all employees of stores operating under a trademark – regardless of franchise ownership. Organizing the few employees in a single store is unlikely to yield sufficient union dues to be worth the time devoted by union staff.

However, this is potentially a huge win for franchising. The decision affirms that a restaurant franchisor’s “requirements regarding food preparation, recipes, menu, uniforms, décor, store hours, and initial employee training prior to a franchise opening are not evidence of control over [its franchisees’] labor relations but rather establish [its] legitimate interest in protecting the quality of its product and brand.” If the NLRB follows this reasoning going forward, this sort of ruling will mean that “the sky is not falling” on traditional and reasonable franchising practices.