What the NLRB’s Joint-Employer Rule Reversal Means for Franchisee and Staffing Agency Business Models
In 2023, I saw my client sit nervously while we waited for an evaluation of the effects that the NLRB’s joint employer rule would have on how their franchise business operates and develops. Amidst all the changes in the law regulating labor, it felt as though the ground was constantly shifting away from underneath my feet. The overturning of the NLRB joint employer rule 2026 franchise liability created an enormous sense of relief throughout the entire industry as a result of how significant these changes would be; however, businesses should realize that while risks are still present, they have also changed.
The Issue: Businesses are continuously struggling to find the right balance between consistency in operations and the potential legal ramifications of being a “joint employer,” exposing such businesses to the risk of severe liabilities and the potential for unionization efforts.
The Concerns: Maintaining brand standards in a franchise business model without exercising the degree of “direct control” over the franchisee’s business such a relationship would create co-employment status continues to present challenges, especially in light of increasing labor costs and the increasing complexity of contractual agreements.
The Remedy: It is important to evaluate your operational manuals, disconnect your HR technology platforms, and refine your indemnification language to ensure you are establishing that the franchisee is, for the purposes of employment law, the sole employer of individuals performing work for the franchisee.
Prerequisites and Context
In order to understand the implications of the changes to the NLRB’s joint employer rule for your business, you will need three things: You must fully understand your current Franchise Disclosure Document (FDD), you must understand your current franchise agreement and you must have an accurate map of your current HR technology ecosystem. While acquiring an attorney isn’t necessary; you must develop a close working relationship with your lawyer to review your operating procedures.
What Didn’t Work For Me
I thought I could eliminate any supervision of our on-site consultants to correct my “control” issue. What a mistake! Removing the supervision caused quality levels of our brand to decrease, and therefore the franchisee began to take safety shortcuts. I learned, the hard way, that you cannot be “hands-off”; instead, you need to be “hands-on” in terms of the results (the brand standard), but “hands-off” in terms of the process (i.e., how the employee was hired, fired, or disciplined).
Understanding the Regulatory Shift: The NLRB Joint Employer Rule 2026 Franchise Liability
The 2026 rewrite of the law allows much more reliable control standards, reflecting shifts in the labor market. The standard used to determine if an employer has “immediate and direct” control over the essential elements of employment. If you do not sign the checks and do not make a final decision over who will be terminated at the franchisee’s location, you are in a considerably less risky position than under the previous law due to the much broader interpretation of what constituted control.
The Anatomy of Control: Franchisor vs. Franchisee Dynamics
Defining Indirect vs. Direct Control in Labor Relations
The main issue in the franchisor vs franchisee control debate has to do with whether you control the customers by telling the franchisee what to achieve or controlling the franchisee by telling him/her how to achieve the result. For example, if the franchisor requires that the franchisee maintain a clean store, the franchisor is specifying brand standards. However, if the franchisor requires the use of a particular discipline form when disciplining an employee for being late, then the franchisor is creating joint-employer status.
Assessing Staffing Agency Co-Employment Risk
If you utilize temporary or staffing agencies to meet your hiring needs, it’s important to understand there is a risk associated with staffing agency co-employment risk. For example, if any of your employees manage the daily tasks performed by temporary or staffing agency workers, you become a co-employer of those temporary/staffing agency workers.
Comparative Control Indicators Table:
- 2023 Standard: Included reference to “indirect” or “reserved” control as part of the air tight contract.
- 2026 Reversal: Requires you to have “direct and immediate” control of key terms and conditions associated with hiring/firing, wage and compensation, and scheduling.
Operational Impacts: Labor Cost Pass-Through and Contractual Safeguards
Renegotiating the Franchise Agreement Indemnity Clause
You should evaluate the language in your franchise agreement related to the franchise agreement indemnity clause. The language should include that the franchisee is the sole employer, and be required to indemnify the franchisor against any labor related lawsuit brought against the franchisor as a result of the franchisee’s employment practices. This provides you with an initial defense against those claims.
Adjusting Liability Insurance for Expanded Risk Profiles
Do not assume that your current policy will cover you for liability insurance adjustments resulting from the use of a staffing agency. An indemnification provision in a franchise agreement may not be sufficient protection to the franchisor from joint-employer liability. You should discuss your liability insurance coverage with your broker, and investigate any adjustments that should be made to your policy to cover joint employer liability, to allow you to protect your liability if a compensation claim should arise against either the temporary/staffing agency or yourself.
Essential FDD Clauses Checklist:
- Independent Employer Clause: clearly states that the franchisee is the sole employer
- Operational Autonomy: clearly states that the franchisee must have full control over the hiring, firing and discipline of their employees
- Indemnification: requires the franchisee to defend and indemnify the franchisor in all claims made as a result of the franchisees employment related employment practices
- Vendor Responsibility: makes the franchisee solely responsible for entering into contracts with third-party staffing agencies
Navigating the Surge: Managing the Union Election Petition Spike
Based on our observations, service sector unions have increased the number of union election petition spike being filed. As soon as workers realize the “big brand” is the one really in control, they start to consider organizing themselves into a union.
Proactive Employee Engagement Strategies
To be successful in deterring unions, the best thing you can do is make sure that all of your franchised businesses are treating their employees well. Provide training to your franchisees on creating positive relationships with employees, and if the franchisees are good bosses, the employees will not look for representation from outside of the business.
Documenting Independent Contractor Test Updates
The independent contractor test update is very important for field consultants or trainers specializing in the franchise. You need to be careful that these employees do not appear to be employees of the franchise.
Worker Classification Flow Chart (Logic):
- Does the worker have their own business entity? (Yes -> Proceed / No -> Re-evaluate)
- Do they set their own hours? (Yes -> Proceed / No -> Re-evaluate)
- Do they provide their own tools? (Yes -> Proceed / No -> Re-evaluate)
Edge Case Analysis: The “Shadow Management” Workaround
Mitigating Liability When Providing Operational Support Systems
Many franchisors want to give “complete turn-key” HR systems, but this is dangerous to your franchising concept. If the franchisors provide the software that handles payroll for the franchise, they are ultimately providing tools to control the franchises.
Strategic Decoupling of HR Tech Stacks to Limit Vicarious Liability
Moving towards using a model where the franchisee chooses their HR tech stack makes great business sense. Using strategic decoupling of HR tech stacks gives your franchisee total control of the data and the entire decision-making process.
Best Practices for Compliance and Risk Mitigation
Implementing Tiered Oversight Protocols
Do not have direct oversight; instead, implement tiered oversight protocols. Look at the outputs (e.g., customer satisfaction ratings, health inspection scores) rather than the inputs (e.g., total hours worked by an employee).
Auditing Third-Party Vendor Agreements for Co-Employment Triggers
You must audit each contract. If the vendor agreement allows for you to determine staffing levels for them, you have a co-employment issue.
Sample Audit Template (Logic):
- Contract Section: Does it include hiring and firing? (If yes, then remove)
- Supervision: Does the franchisor provide supervision to the vendor’s employees? (If yes, change to “vendor supervisor”)
- Wages: Is it stated that the franchisor shall determine pay rates for the vendor? (If yes, then remove)
Frequently Asked Questions
How does the 2026 reversal specifically protect franchisors from unfair labor practice charges?
The “direct and immediate” control requirement narrows the number of parties named in an unfair labor practice charge. Because of this requirement, it will be difficult for a union to include a franchisor in a dispute that is strictly between a franchisee and their employees.
What immediate steps should staffing agencies take to insulate themselves from client-side unionization efforts?
Staffing agencies should define the client in their contract as the “on-site supervisor” for all daily tasks performed by agency employees. The staffing agency should avoid placing their managers on the client’s site at any time to direct the work being done.
Will the updated independent contractor test affect how franchise systems handle regional field consultants?
Yes. If you are treating your field consultants like employees, you will be required to change their classification or their scope of work to ensure they are truly independent contractors. There is more information on these labor standards at the Department of Labor.
