The Employer's Legal Resource: NLRB General Counsel Issues Advice Memo On "Joint Employer" Status Of Restaurant Franchise

06.01.15

In connection with unfair labor practice charges regarding the termination of two employees, the General Counsel of the National Labor Relations Board recently released a memorandum advising that a restaurant chain franchisor is not a "joint employer" with the franchisee of a single restaurant location that issued the discipline to employees for attempting to unionize their workforce. Freshii Development, LLC, is a fast-casual restaurant chain with over 100 locations aimed at serving fresh and nutritious meal choices, which stores are operated as independent franchises in more than a dozen countries. Nutritionality, Inc., is a Freshii franchisee that operates a single restaurant location in Chicago, Illinois, pursuant to its executed franchise agreement with Freshii.

Franchise Agreement

The Freshii franchise agreement grants a franchisee the right "to own and operate a Freshii Restaurant using [Freshii's] business system, business formats, methods, procedures, designs, layouts, trade dress, standards, specifications and [trademarks], all of which [Freshii] may improve, further develop, and otherwise modify periodically" in exchange for payment to Freshii of an initial franchise fee and ongoing royalties (in a specified percentage of monthly sales revenues). Freshii provides its franchisees with an Operations Manual that "contains mandatory and suggested specifications, standards, operating procedures, and rules that Freshii periodically prescribes for operating a Freshii restaurant," which are known as "System Standards." The franchise agreement states that System Standards may regulate any aspect of the operation and maintenance of the restaurant, including: sales, marketing, advertising and promotion materials; staffing levels, appearance, service, and job functions for restaurant employees; pricing requirements; ingredients and methods of preparing foods; standards for training managers; use of trademarks; days and hours of operation; payment systems; and any other aspects of operating and maintaining the restaurant that Freshii determines to be useful to preserve or enhance the efficient operation, image, or goodwill of Freshii.

The franchise agreement expressly states, however, that these mandatory System Standards do not include "any personnel policies or procedures." Freshii may provide various personnel policies for franchisees' optional use, but the franchisee alone will "determine to what extent, if any, these policies and procedures might apply" to its restaurant operations. Freshii "neither dictates nor controls labor or employment matters for franchisees and their employees" pursuant to the franchise agreement. The Operations Manual provided to Freshii franchisees does, in fact, contain some guidance on human resources matters such as hiring and scheduling employees, but Freshii does not require franchisees to follow its guidance on these topics. For example, the Operations Manual includes a sample hiring advertisement and sample interview questions to ask potential hires, and it also explains h ow to calculate "labor cost percentage" based on the actual labor used and how to project labor calculations to schedule staff in advance. Freshii additionally provides franchisees with a sample employee handbook that contains personnel policies for the location's workforce, but Freshii does not require franchisees to use the handbook and policies therein (although Nutritionality has voluntarily chosen to do so).

Freshii's Involvement in Nutritionality's Franchise Operations

When a new franchise is set to open, Freshii provides mandatory training for both owners (four weeks) and employees (three days). After the initial store opening, however, franchisees are wholly responsible for training their staffs without any additional assistance from Freshii. Once a store is operational, Freshii's agents perform monthly store evaluations for all franchisees. The purpose of the monthly evaluations is to prevent significant deviations from mandatory brand standards and ensure that everyone is wearing Freshii uniforms, the food is being made correctly, the store is clean, and proper promotional material is on the wall, but there are no employment-related standards involved in these evaluations. In addition to these evaluations, Freshii agents also visit each location once or twice per month and provide feedback to the franchisee, although franchisees are not required to take any action based on the agents' comments.

Individual franchisees are exclusively responsible for hiring all of their employees. Although Freshii's website allows potential applicants to apply to franchise locations online, Freshii merely forwards that information to the franchisees and does not screen or analyze the applications in any way. Likewise, individual franchisees are exclusively responsible for setting employee wages and benefits. Nutritionality is not required to consult with Freshii before making any decisions or changes regarding these matters and, in fact, it has previously both increased and decreased specific employees' wages unilaterally without seeking approval from Freshii. Individual franchisees are also exclusively responsible for disciplining and discharging their employees, and Nutritionality has taken such actions on numerous occasions without consulting Freshii prior to doing so. Though the Operations Manual provided by Freshii includes policies regarding employee counseling and conduct that may warrant discharge, such guidance is optional and not mandatory; the franchise agreement explicitly states that it is up to the individual franchisee to decide to what extent, if any, it wants to follow Freshii's personnel policies.

Further, Freshii had no involvement in Nutritionality's labor relations generally, nor the specific unfair labor practice at issue regarding employees being disciplined for participation in a union organizing campaign. Although Nutritionality's owner told Freshii's agent that employees had presented him with a letter asking to recognize a union as their collective bargaining representative, Freshii did not instruct him how to respond or otherwise discuss the matter in any way.

Freshii and Nutritionality are not Joint Employers under the NLRB's Current Standard

The NLRB concluded that Nutritionality and Freshii are not joint employers under the NLRB's current standard for evaluating joint employer status. Under this standard, the NLRB will consider two separate entities to be joint employers of a single workforce if they "share or codetermine those matters governing the essential terms and conditions of employment." To establish such status, an entity must meaningfully affect matters relating to the employment relationship "such as hiring, firing, discipline, supervision, and direction." Other factors have also been considered in making a joint employer determination, including an entity's involvement in decisions relating to wages and compensation, the number of job vacancies to be filled, work hours, the assignment of work and equipment, employment tenure, and an employer's involvement in the collective bargaining process.

Applying the current standard, NLRB's General Counsel found that Freshii did not meaningfully affect any matters pertaining to the employment relationship between Nutritionality and its employees. Freshii played no role in Nutritionality's decisions regarding hiring, firing, disciplining, or supervising employees, and only Nutritionality was responsible for determining its employees' wages, raises, or benefits. While potential applicants were able to submit resumes through Freshii's website for employment at franchise locations like Nutritionality's, Freshii did not screen the resumes or do anything other than forward them on to Nutritionality and other individual franchisees. Further, Nutritionality's owner regularly increased and decreased employees' wages without Freshii's involvement. Neither was Freshii involved in Nutritionality's scheduling and setting work hours of its employees. While Freshii provided gener al guidance on how to calculate labor costs to ensure that restaurants were not over- or under-staffed, Freshii never instructed Nutritionality to reduce an employee's hours or set an employee's specific work schedule. Additionally, all of the training provided by Freshii dealt primarily with the initial opening and operation of a restaurant. After the preliminary training that occurred when a location opened, Freshii had no involvement whatsoever in any future training, a fact which the General Counsel noted "highlight[s] a lack of impact on franchise employees' terms and conditions of employment."

All of the above evidence "is consistent with the clear language of the franchise agreement, which gives the franchisee the power to determine whether to use Freshii's personnel policies or procedures and states that Freshii 'neither dictates nor controls labor or employment matters for franchisees and their employees.'" Other than the recipes and décor elements, the remaining sections of Freshii's Operations Manual are recommendations rather than mandatory requirements and the monthly evaluations and store visits are "limited to inspecting franchisees' adherence to Freshii's mandatory brand standards, primarily the menu and food products, and are not used to examine any employment-related policies." The NLRB explained that "[a]t most, Freshii's control over Nutritionality's operations are limited to ensuring a standardized product and customer experience, factors that clearly do not evince sharing or codetermining matters governing essential terms and conditions of employment…Freshii'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 Nutritionality's labor relations but rather establish Freshii's legitimate interest in protecting the quality of its product and brand."

The NLRB also found it significant that the franchisor had not become involved in how the franchisee handled the events precipitating the current unfair labor practice charge. Notably, "[e]ven after Nutritionality's owner asked Freshii…for advice on the situation, Freshii remained silent and did not interfere or instruct Nutritionality's owner as to how to respond to the employees' organizing efforts."

Freshii and Nutritionality are not Joint Employers under the General Counsel's Recently Proposed (Traditional) Standard

In recent months, the General Counsel has urged the NLRB to abandon the current standard described above and return to its traditional joint employer standard. Under the traditional standard, the NLRB finds joint employer status where, under the totality of the circumstances, including the way the separate entities have structured their commercial relationship, the putative joint employer wields sufficient influence over the working conditions of the other entity's employees such that meaningful bargaining could not occur in its absence. This approach makes no distinction between direct, indirect, and potential control over working conditions and results in a joint employer finding where "industrial realities" make an entity essential for meaningful bargaining.

Applying this traditional/proposed standard, the NLRB reached the same result as under its current standard, finding that Freshii and Nutritionality are not joint employers of Nutritionality's employees. For reasons similar to those discussed in the previous analysis, the General Counsel concluded that Freshii does not significantly influence the working conditions Nutritionality's employees. "Thus, because 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.

The NLRB General Counsel's advice memorandum is available on their website: http://www.nlrb.gov/cases-decisions/advice-memos.

By Rebecca D. Stanglein, rstanglein@dsda.com

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Rebecca D. Bullard

Rebecca D. Bullard

Rebecca represents clients primarily in labor and employment
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