Ronald Under Fire: McDonald’s May Be Liable for Franchisees’ Actions

Large companies known as “franchisers” often allow “franchisees,” or smaller independent contractors, to use their trademark and distribute their goods or services for a fee. Most people are familiar with the franchise model in the fast-food in­dustry. Your local McDonald’s, for instance, is a franchise of the larger McDonald’s company. The franchisee sets the work­place conditions but must conform to the regulations set forth by the franchiser. Based on this model, franchisees have been commonly understood to be wholly independent from franchis­ers. The National Labor Relations Board (NLRB) may have upended the franchise model, however.

The NLRB’s General Counsel recently issued a notice stating that McDonald’s, USA, LLC, could be named as a joint employer of workers at its franchisee-owned restaurants. Spe­cifically, a group of workers were authorized to proceed with their complaints of alleged violations of the National Labor Re­lations Act (NLRA) against the McDonald’s parent company. That means McDonald’s could be held jointly liable for labor violations by thousands of its franchise operators across the United States.

Facts

In the past few years, McDonald’s employees have engaged in protests across the country demanding higher minimum wages. In response to those pro­tests, several McDonald’s franchisees have taken ac­tion against the workers, including terminating some of them. The employees have filed unfair labor practice charges with the NLRB accusing McDonald’s and its franchisees of illegally firing, threatening, or otherwise penalizing them for their prolabor activities. More than 100 workers have complained to the NLRB.

The workers, backed by the Service Employees Inter­national Union (SEIU), sought to hold McDonald’s liable for its franchisees’ allegedly unlawful activities. They assert that McDonald’s is a joint employer with its fran­chises because it has direct control over the franchisees since each franchise is required to follow strict rules and regulations set by the franchiser. Given that direct con­trol, the workers claim they are employed by McDon­ald’s and not their actual employer, the franchisee.

NLRB’s Notice and Next Steps

As the law currently stands, employers that are le­gally separate but exercise a significant degree of control over the same employees’ essential terms and conditions of employment may be joint employers. The NLRB has held in the past that an employer must exercise “direct and immediate control” over employees to be deemed a joint employer. The decision to designate McDonald’s as a joint employer suggests that the Board may be recon­sidering the definition of a joint employer by expanding the scope of “direct and immediate control.”

This isn’t the first time the NLRB has reconsid­ered the joint employer definition. The Board is cur­rently reconsidering the standard in another case, In Re: Browning-Ferris Industries of California, Inc., which may be decided before the McDonald’s matter is resolved. The outcome of the Browning-Ferris case will likely have im­plications for the McDonald’s case.

The NLRB’s notice didn’t provide any insight about the analysis used to determine McDonald’s joint em­ployer status. Supporters of the notice argue that routine franchiser practices, such as tracking labor costs and sales, are sufficient evidence of McDonald’s control. On the other hand, opponents argue that a typical franchise relationship doesn’t create the level of control needed to meet the joint employer test. Rather, they assert that a franchisee is an independent contractor and the fran­chiser doesn’t assume any liability for the franchisee’s employment practices.

This will likely be a long process for both the work­ers and McDonald’s. If the parties don’t settle, unfair labor practice charges will be issued against McDonald’s and its franchisees. The parties will then have hearings before an administrative law judge, followed by appeals to the NLRB. Given the importance of this decision, an appeal to the U.S. Court of Appeals is also likely. Thus, it will be some time before the issuance of any decision that will affect the franchise model.

Bottom Line

Employers that have franchises should monitor these cases. The NLRB’s decision could have far-reaching im­plications for all types of industries that use a franchise model, including dry cleaners and car dealerships. In the future, franchisers may be exposed to liability for the unlawful labor violations of their franchisees. Ulti­mately, the decision may force companies to be more ac­countable for franchisees’ actions.

This article was featured in the September 2014 issue of the Wisconsin Employment Law Letter, which is edited by Axley Brynelson Attorneys Michael Westcott and Leslie Sammon, and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.

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