For months, franchise industry has been on edge – worried that a new federal rule it may undercut the franchise model itself. Now, some are breathing a sigh of relief. On Friday evening, a federal judge in Texas struck down Rules. “This is a historic win for the franchise,” he said International Franchise Association (IFA) said in a statement to its members.
Common employer rule
The federal rule is known as “Joint employerSome form of rule has existed for years, but in 2023 National Labor Relations Board expanded it in a way that directly impacted the franchise. Under the new version of the rule, two companies – say, a McDonald's and a McDonald's franchisee – can more easily be considered “joint employers” of the same employees.
This would do, for example McDonald's legally responsible for any labor violations committed by one of its franchisees, even though McDonald's itself did not employ or manage that employee, and therefore may complicate the relationship between franchisors and franchisees.
Connected: This new rule will destroy the franchise as we know it
Franchise 'fundamentally turned upside down'
The expanded rule would “fundamentally overturn the franchise business model,” it said the IFA said at the time. “The rule would reduce the independence of franchise business owners, reduce franchisees' equity in their businesses, and force franchisors to provide less support.” The expanded rule would also make it easier for employees join.
The IFA was one of many organizations – including American Chamber of Commerce, American Hotel and Lodging Association AND National Retail Federation — to sue to block the rule in November.
Implementation of the rule had been delayed as litigation continued. Although the rule will now no longer be in effect, the issue is not completely resolved. The National Labor Relations Board may appeal the decision, although it has not yet said whether it will. The NLRB can also review the common employer rule.
Connected: This new government rule threatens to disrupt America's $825 billion franchise system
Congress resolution
A more lasting resolution may come through Congress. In January, the House adopted a resolution to reject the NLRB's common employer rule. Advocates are now urging the Senate to approve the measure and send it to President Biden to sign. According to the IFA, this “will tie the hands of future NLRBs from creating common employer standards and provide long-term certainty for the franchise.”