Texas legislators recently passed S.B. 652, which seeks to protect franchisors from employment liability for the actions of franchisees.  Enacted in June 2015, S.B. 652 amends the Texas Labor Code to specify that a franchisor is not considered an employer of a franchisee or a franchisee’s employee for purposes of claims relating to employment discrimination, payment of wages, the Texas Minimum Wage Act, or the Texas Workers’ Compensation Act, unless the franchisor “has been found by a court of competent jurisdiction in this state to have exercised a type or degree of control over the franchisee or the franchisee’s employees not customarily exercised by a franchisor for the purpose of protecting the franchisor’s trademarks and brand.”  Subject to the same exception, the bill further specifies that a franchisor is not considered to be in a co-employment relationship with a franchisee or a franchisee’s employees for purposes of Texas law governing professional employer organizations, and that the general definition of “employer” in the Texas Unemployment Compensation Act does not apply to a franchisor with respect to a franchisee or a franchisee’s employees. S.B. 652 goes into effect on September 1, 2015.

According to a committee report, S.B. 652 is “an effort to ensure that franchisors in Texas are not held unfairly liable for the actions of franchisees, to prevent frivolous lawsuits, and to encourage franchisees to act responsibly.”  Specifically, the bill is intended as a response to franchisors’ concerns that “recent decisions by the National Labor Relations Board (NLRB) have expanded the definition of an ‘employer,’ called the common understanding of a franchisor-franchisee relationship into question, and opened the door to lawsuits against franchisors for the actions of franchisees.”

Traditionally, the NLRB has treated two companies as joint employers only if both companies exercise a significant degree of direct control over the same employees.  Since at least 1984, the NLRB has examined a franchisor’s actual practices to determine whether the franchisor exercises significant, direct, and immediate control over the essential terms and conditions of employment, such as supervision, discipline, scheduling, hiring, and firing of the franchisee’s employees.  However, as discussed in a prior update, in the summer of 2014 in the pending case of Browning-Ferris Industries of California, Inc., the NLRB’s general counsel proposed a new test that asks whether a putative joint employer “wields sufficient influence” over working conditions based on “the totality of the circumstances.” This proposed new standard focuses not only on the immediate and actual impact of a franchisor’s actions on a franchisee’s employees but also on the potential or hypothetical authority, even if not exercised, that a franchisor could exert over a franchisee’s employees.  The NLRB’s general counsel followed up by initiating several actions against McDonald’s USA, LLC and its franchisees, which seek to hold McDonald’s USA liable as a “joint employer” for alleged labor violations by franchisees.

While the amendments to the Texas Labor Code will not govern decisions by the NLRB (the NLRB applies federal law), the amendments may curtail Texas state law claims against franchisors inspired by the NLRB’s aggressive actions.  Though some questions about the bill’s implementation remain unclear—for example, how will courts determine whether a particular franchisor exceeded the type or degree of control “customarily exercised” by franchisors, and who will bear the burden of proof—S.B. 652’s attempt to codify the “common understanding of a franchisor-franchisee relationship” should provide comfort to franchisors with franchise systems operating in Texas.