The Issue of Joint Employment and Home Health Care Franchisors and Franchisees

Last summer the National Labor Relations Board (NLRB) ruled that a California recycling firm was a joint employer of workers hired by a contractor to help staff the company. Under the new test by the NLRB, a company can be considered a joint employer even if it has only indirect control over working conditions. Unions as a result are expected to seek to apply the ruling beyond the circle of companies that rely on contractors and staffing agencies, and extend it to companies with large numbers of franchisees. In fact, some feel the ruling in the California case had an effect on a case the labor board is litigating against fast-food chain McDonald’s and several of its franchisees. In that case, the NLRB’s general counsel asserts that the company is a joint employer along with a number of franchisees, making it potentially liable for numerous reported violations of workers’ rights, including allegations of discrimination, harassment, retaliation, and wage-and-hour disputes, among others.

Moreover, in January, the Department of Labor (DOL) issued guidance broadening the definition of joint employment, in which two or more businesses can be held responsible for compliance of laws regarding employees. The DOL stated that the definition of “employment” in the Fair Labor Standards Act (FLSA) of 1938 and the Migrant and Seasonal Agricultural Worker Protection Act of 1983 “was written to have as broad an application as possible…It is possible for a worker to be jointly employed by two or more employers who are both responsible, simultaneously, for compliance” of regulations.

The DOL cited as an example an employee who works for two restaurants “that are organized as two different companies but share operations,” such as common managers, common employees or shared scheduling or payroll functions. It also could include a staffing company and the company where that staff member works. The DOL did state, however, that franchisees and franchisors are not necessarily joint employers, although they might be. “The form of business organization, such as a franchise, does not necessarily indicate whether joint employment is present. Indeed, the existence of a franchise relationship, in and of itself does not create joint employment.”

However, since the NLRB ruling in California and the DOL’s updated guidance earlier this year, business representatives asserted that setting up intentionally vague standards to govern the relationship between different businesses, including subcontractors and franchisees, is a recipe for confusion, litigation and overzealous enforcement. In fact, five states have fought back against the NLRB’s ruling, with the state of Michigan in March joining Wisconsin, Texas, Louisiana and Tennessee by amending its Franchise Investment Law to clarify that, unless the franchise agreement specifically states otherwise, a franchisee is considered the sole employer of workers to whom it pays wages or provides a benefit plan.

It is important to note, though, that federal law preempts overlapping or potentially conflicting state law. As the NLRB applies federal law, the recently enacted state laws may be subject to challenge on preemption grounds under the NLRB, according to law firm Duane Morris.

In the meantime, the recently enacted state laws will impact state law claims, which may be filed against franchisors and franchisees in state court. Furthermore, franchise associations are urging other states to similarly amend their franchise laws. For example, in states such as Michigan that have enacted similar amendments to its franchise laws, legal advisers are recommending that  franchisors immediately consider amending their franchise agreement to reflect the new laws to plainly state that the franchisee, and not the franchisor, is the sole employer of workers to whom the franchisee provides a benefit plan or pays wages. Also, it is recommended that a review of all business practices be conducted with regard to the franchisor’s interaction with the franchisee and its employees to avoid acting on workers’ behalf, which may give rise to a ‘joint employer’ claim, and to contact legal counsel on how the changing laws may potentially impact both the business and business practices.

On a national level, franchisors and franchisees are closely watching the McDonald’s case, which began in March, nearly two years after the NLRB first took a look at the fast-food chain case. “What’s interesting about the McDonald’s case is that it’s the quintessential franchise,” said Cesar Rosado, an associate professor of labor law at Chicago-Kent College of Law, in an article published in the Chicago Tribune. “If they find that McDonald’s is a joint employer, it doesn’t mean that all companies with franchises (could be considered) joint employers, but many of them are very likely going to be.”

Manchester Specialty offers a totally integrated business insurance solution for the broad spectrum of health care, including medical staffing firms and home care franchisors and franchisees. Please check back for up to date blog posts and articles on any clarifications to rulings that could impact firms and their employment practices exposures. Our total business insurance solution includes Workers’ Compensation and Employment Practices Liability insurance, which pays for legal costs, settlements and damages associated with employment practices allegations. You or your local agent/broker can contact us at 855.972.9399 for more information about our insurance coverage solutions.