Understanding the NLRB’s New Joint-Employer Ruling

Why the Joint-Employer Ruling Is Favorable to the Employers It Covers

Buying a Home Based Franchise
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The National Labor Relations Act (NLRA) of 1935—also called the Wagner Act—governs employer and management relationships. Sometimes people think it just relates to unions, but it also applies to non-unionized companies. Even though this is an 85-year-old law, enforcement has changed over the years, due to court cases and changes in the National Labor Relations Board (NLRB) membership.

The NLRB consists of five members who are appointed by the President and confirmed by the Senate. Their terms last for five years and rotate so that one person shifts out every year. 

In 2018, former President Barack Obama’s appointees were rotated out and Republicans were given 3-2 majority rule of the NLRB with the confirmation of President Donald Trump’s nominee, John Ring. Following these changes in membership, the NLRB has subsequently made revisions to what’s known as the joint-employer standard. Here's how the changes affect your business.

The Joint-Employer Standard in Context

As a general rule, companies hire employees, control their work, pay them, and are responsible for all of their legalities. But when you have a joint-employer situation, it becomes a bit murkier. 

For example, a temporary employee who gets paychecks from the temp agency but takes direction from a local manager can have joint-employer status.

Recently, conflicts have occurred between McDonald's and the NLRB because of joint-employer issues. Most McDonald's restaurants operate as franchises owned by regular people rather than the corporate office. Under the Obama appointees, the corporate office was held responsible for monitoring employment law compliance at the franchises. 

In December 2019, however, the NLRB sided with McDonald's and released new guidance on the joint-employer standard. This 53-page document goes into effect April 27, 2020. 

You can find a critical definition on page 14 of the ruling: "Under the rule, such ordinary contractual relationships do not make the outsourcing company a joint employer so long as it does not possess and exercise substantial direct and immediate control over essential terms and conditions of employment of employees performing the outsourced functions.”

Questions for Employers to See If the Joint-Employer Standard Applies

In simpler terms, here are several questions you can ask to see if the joint-employer standard applies. If you answer yes to all or most of these, then you are in a joint-employer situation—otherwise, not.

  1. Does the outsourcing company influence hiring?
  2. Does the outsourcing company influence firing and/or discipline?
  3. Does the outsourcing company set pay and benefits policy?
  4. Does the outsourcing company conduct training related to employment law, such as sexual harassment, code of conduct, and overtime pay?
  5. Does the outsourcing company maintain the employment records of the employees?

These questions, of course, aren’t necessarily exhaustive, but they can give you a good start in determining the relationship between your businesses and the other company involved.

In the Franchise Model, Joint-Employer Standard Applies

While it may seem to only apply to restaurant chains like McDonald's, the franchise model cuts across many industries, from car rentals and real estate agencies to hotels and daycares. 

Cheryl A. Bachelder, former CEO of Popeyes, explains the advantage of the franchise model, saying, "From a strategic point of view, it's asset-light, has a reliable cash flow, and expands a brand by leveraging entrepreneurs' capital and operating expertise.” Bachelder adds that another advantage is the opportunity to develop pivotal relationships with franchisees, who she notes are “passionate, talented entrepreneurs…[who have] made a huge investment of money and time” and are “...buying into the brand in a way that traditional employees don't."

This recent NLRB ruling allows this relationship to continue and people with an entrepreneurial spirit to run their own businesses. Because the corporate entity is only responsible for the employees, if it exercises control over them, it can protect itself by stepping back.

The Bottom Line

Because the ever-changing NLRB makes this decision, it's possible that in a few years, this federal agency could have a completely different take on how the joint-employer relationship looks. But for now, you can create a wall of separation between two businesses that handle the same employees.

Article Sources

  1. CQ: National Labor Relations Board. "Who We Are." Accessed April 20, 2020. 

  2. The National Law Review. "Senate Confirms Ring to NLRB, Restoring 3-2 Republican Majority." Accessed April 20, 2020. 

  3. U.S. Department of Labor, Wage and Hour Division. "Joint Employer Final Rule Frequently Asked Questions." Accessed April 20, 2020. 

  4. The New York Times. "McDonald's Notches Big Victory in Labor Board Ruling." Accessed April 20, 2020. 

  5. National Labor Relations Board. "Federal Register: Joint Employer Status Under the National Labor Relations Act." Accessed April 20, 2020.

  6. Franchise Direct. "Top 100 Franchises 2020." Accessed April 20, 2020. 

  7. Harvard Business Review. "The CEO of Popeyes on Treating Franchisees as the Most Important Customers." Accessed April 20, 2020.