Direct vs. Indirect Control: What Constitutes a Joint Employer?

The past year marked substantial changes in the employment practices arena for both insureds and underwriters.

Formed during the Great Depression, the National Labor Relations Board (NLRB) is an independent federal agency that protects the rights of private-sector employees. During the Reagan administration, the NLRB defined what constitutes a joint employer, with a standard that focused on degree of control. To be considered a joint employer, a company must maintain direct control over operations, hours, working conditions and the like.

The changes started in 2015 with the Browning-Ferris decision, which changed a 30+-year rule that distinguished between direct and indirect control of employees. The new NLRB standard is that a company qualifies as a joint employer if it asserts indirect control over the terms and conditions of employment.

Now, employers that use staffing agencies, independent contractors or franchisors face an employment practices liability risk they did not have in the past. No industry is more affected by this than the franchise industry, because the franchise model involves franchisees using a franchisor’s name, trademark, business practices, established methods and business plan, including things like operations manuals.

And it gets worse for franchisors. In Salazar v. McDonald’s Corp., the plaintiff brought a suit against a local McDonald’s franchisee and McDonald’s the franchisor on behalf of current and former McDonald’s restaurant crew members. The class-action suit alleges joint employer responsibilities, among other allegations. The court denied a motion from McDonald's the franchisor for summary judgment on joint employer.

The plaintiffs alleged that they and the franchisee worked for McDonald’s because they wore McDonald’s uniforms, served McDonald’s food, received management training from McDonald’s and more. Although the court determined that no direct agency existed because McDonald’s the franchisor did not control the hiring, firing, or day-to-day activities of the franchisee’s employees, it did find sufficient evidence of “ostensible agency.” If this case proceeds to trial, the consequences could be enormous.

Some good news: In August 2016, Subway entered into a voluntary agreement with the NLRB, marking the first “partnership” and what some believe could be a model for future franchise relationships. Subway will assist the Department of Labor (DOL) in creating compliance materials for the franchise restaurant industry, and will share this information with its franchisees. Subway and the DOL will meet quarterly to discuss possible steps for enhancing compliance. Based on early reports, the joint effort will be shared with other agencies and franchisors.

What does all this mean for EPLI? You only have to review the definition of “insured” to realize that standard EPLI policies are not designed to cover joint employment matters. Consider this example: Company A hires Company B to manage its employees. An employee of Company B who is based in Company A’s office sues Companies A and B. Company A must demonstrate it had no indirect control over Company B’s employee.

The NLRB has the power to influence the Department of Labor and other federal agencies that cover employment law—and for many employers, that’s cause for concern. Now, insurers must decide if they need to include an overt exclusion, or if staying silent will help them avoid being pulled into joint employer-related litigation. As this issue comes to the forefront, expect a proliferation of joint employment exclusions.

Peter R. Taffae is managing director and Oscar Paz is an associate broker at Executive Perils, Inc.