The Rule That Would've Crushed Franchising Was Just Struck Down — But the Fight Isn't Over. Although this court decision provides temporary relief to franchisors and franchisees, the issue remains unresolved.
By Jason Feifer Edited by Carl Stoffers
Key Takeaways
- A significant legal battle unfolded around the expansion of the Joint Employer Rule.
- This rule posed significant challenges for the franchise model by potentially increasing the legal liability for franchisors.
- Although the rule will not go into effect, the issue is not completely resolved.
For months, the franchise industry has been on edge — concerned that a new federal rule could undercut the very model of franchising. Now, some are breathing a tentative sigh of relief. On Friday evening, a federal judge in Texas struck down the rule. "This is a landmark victory for franchising," the International Franchise Association (IFA) said in a statement to its members.
The Joint Employer Rule
The federal rule is known as "Joint Employer." Some form of the rule has existed for years, but in 2023, the National Labor Relations Board expanded it in a way that directly impacted franchising. Under the new version of the rule, two companies — say, a McDonald's and a McDonald's franchisee — could more easily be considered "joint employers" of the same employees.
That would, for example, make McDonald's legally liable for any labor violation committed by one of its franchisees, even though McDonald's itself did not hire and does not manage that employee, and therefore could complicate the relationship between franchisees and franchisors.
Related: This New Rule Will Crush Franchising As We Know It
'Fundamentally upend' franchising
The expanded rule would "fundamentally upend the franchise business model," the IFA said at the time. "The rule would reduce the independence of franchise business owners, diminish franchisees' equity in their businesses, and force franchisors to offer less support." The expanded rule would also make it easier for employees to unionize.
The IFA was one of many organizations — including the U.S. Chamber of Commerce, the American Hotel and Lodging Association and the National Retail Federation — to sue to block the rule in November.
The rule's implementation had been pushed back as the litigation continued. Although the rule will now no longer go into effect, the issue is not fully resolved. The National Labor Relations Board can appeal the ruling, although it has not yet said if it will. The NLRB could also revise the joint employer rule.
Related: This New Government Rule Threatens to Disrupt the $825 Billion U.S. Franchise System
Congressional resolution
A more lasting resolution may come through Congress. In January, the House passed a resolution to reject the NLRB's joint employer rule. Advocates are now urging the Senate to pass the measure and send it to President Biden to sign. According to the IFA, this "would tie the hands of future NLRBs from instituting expansive joint employer standards and provide long-term certainty to franchising."
