Among the most fundamental benefits of the franchise model are the benefits that are leveraged by the separation between franchisors and franchisees. Franchisors can expand their brand and system without having to take the expense and liability of capital investments and operations, while franchisees can be independent business owners and leverage the benefits of the system without having to develop a model and brand on their own. To date in Canada, franchisors have enjoyed of the key benefit of limited liability for their franchisees’ operations – including by not being liable as the joint employer of the persons working for their franchisees.
Vicarious liability for the acts and omissions of franchisees, and the related question of whether a franchisor should be deemed a “joint employer” with its franchisees, are therefore crucial issues for franchisors. If franchisors are considered per se joint employers, this threatens and strikes at the very heart of the benefits and viability of franchising for franchisors.
Recent debate and proposed changes to laws in the U.S. are generating significant debate and may influence policy makers here in Canada.
Current changes expanding the scope of joint employers in the United States recently challenged
In the United States, the National Labor Relations Act[i], or NLRA, is a federal statute that governs private sector employers and employees. The National Labor Relations Board (the Board) has jurisdiction when it comes to enforcing and supervising the NLRA. The Board describes the NLRA as legislation that “protects workplace democracy by providing employees at private-sector workplaces the fundamental right to seek better working conditions and designation of representation without fear of retaliation.”[ii]
The NLRA does not include a definition of “Joint Employer”, but the term became judicially defined through the courts and NLRB decisions. The term “joint employer” was understood to mean that, “Two employers are a joint employer if they share or codetermine those matters governing the employees' essential terms and conditions of employment.”[iii] As previously developed, the relevant legal test required evidence of direct control; indirect control, or the potential option to exercise control, was insufficient.
Following a history of debate, discussed below, recent changes to the NLRA’s rules by the Board that were set to come into effect March 11, 2024 fundamentally shifted the prior law and joint-employer rule. The new rule provides, “For all purposes under the Act, two or more employers of the same particular employees are joint employers of those employees if the employers share or codetermine those matters governing employees' essential terms and conditions of employment.” The new rule provides that “possessing the authority to control” is sufficient to satisfy the definition of joint employer, “regardless of whether control is exercised”, and indirect power to control is similarly sufficient, even if that control is exercised through an intermediary. The rule obviously brings all franchise relationships within its ambit of application.
The new rule was recently challenged by the Chamber of Commerce of the United States and others, and on March 8, 2024 was struck down by a U.S. Texas District Court. In its judgment Judge Barker held:
[E]nforcement against plaintiffs or their members of the rule issued by the National Labor Relations Board on October 27, 2023, entitled Standard for Determining Joint Employer Status, 88 Fed. Reg. 73,946, would be contrary to law as to the rule’s addition of a new 29 C.F.R. § 103.40 and arbitrary and capricious as to its removal of the existing 29 C.F.R. § 103.40 (2020). In both respects, the rule is hereby vacated. [iv]
There are concurrent and other legal challenges that are underway as well. The NLRB Chair responded in a statement, “The District Court’s decision to vacate the Board’s rule is a disappointing setback, but is not the last word on our efforts to return our joint-employer standard to the common law principles that have been endorsed by other courts”.[v]
The issue remains hotly contested, and the outcomes and developments will have critical impact on franchised business in the U.S., and potentially in Canada.
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