California Federal Court massages franchisor woes – but some knots still need to be worked out

On January 6, 2015, Judge Benitez in the Southern District of California Federal District Court stuck to the traditional meaning of “joint employer” in a case brought by an employee of a Massage Envy franchise location, against the Massage Envy franchisor despite the NLRB’s recent announcement that it will be creating a looser “joint employer” standard. As we recently reported, the NLRB is hearing numerous complaints brought by McDonald’s franchisee employees against the McDonald’s franchisor entity, McDonald’s USA LLC, sending the message that it intends to ease the “joint employer” standard considerably.

Despite the NLRB’s decision to move forward with the McDonald’s complaints, the California District Court judge held that the Massage Envy franchisor was not a joint employer with the individual franchisee spa location. The court cited to the fact that the franchisor operations manual, which was “optional and not mandatory,” provided that the franchisee was the one responsible for hiring, firing, managing and compensating employees. The court also found that the franchisor regional director did not conduct periodic checks or surveillance on the individual franchisees, which pointed to a separate employer relationship, not a “joint employer” relationship. The factors the court considered comport with the long-standing “joint employer” standard, which focuses on the degree of control a franchisor exerts over franchisee employees.

The NLRB General Counsel, responsible as the chief prosecutor in NLRB complaints (not to be confused with NLRB board members who are responsible for rendering the NLRB decisions), indicated the new proposed joint employer standard would cause franchise businesses to be joint employers when the franchisor exercises “indirect control” over the franchisee. Some factors that would be considered in this new standard include:

• The franchisor’s control and supervision of the franchisee’s operational procedures
• The franchisor’s rules or handbook requirements
• The franchisor’s allocation of product
• Franchisor uniform requirements
• The franchisor’s establishment of safety rules and standards

The Massage Envy court found that factors such as a required computer system, a sample script to be used with clients, a limited menu of services available, and a prohibition on the use of scented massage oils were details which “ensur[ed] that a client can receive the same type of experience in California as she does in Texas.” These are the same factors, which under the new proposed standard could be used against a franchisor to establish a joint employer relationship. Thus, the proposed “joint employer” standard presents a frustrating issue for franchisors; the very design and purpose of a franchise style business may now also be its biggest pitfall.

Franchisors cannot relax just yet, as the NLRB has not yet officially released its new “joint employer” standard and thus the California District Court was not required to consider it. In anticipation of the NLRB’s changes franchisors should consider factors which may open them up to “joint employer” liability and loosen control over franchisees in areas which practically work best for their businesses. We will continue to keep you updated as this important issue develops.