NLRB Challenges Franchise Model in Complaint Against McDonald’s

by Perkins Coie
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Last week, in an unprecedented shift away from long-standing Board precedent, Richard F. Griffin, Jr., General Counsel of the National Labor Relations Board (NLRB), asserted that McDonald’s, USA LLC (McDonald’s USA)—the franchisor of the McDonald’s system—may be liable as a “joint employer” for alleged unfair labor practices of individual franchisees.

We are supporting the International Franchise Association’s (IFA) efforts in opposing the General Counsel’s determination by urging clients and other franchisors to get involved.  We encourage you to join us at the upcoming IFA Public Affairs Conference, September 16-17, in Washington, D.C.  Perkins Coie is a sponsor of the conference.  Further, please consider joining the IFA’s newly formed Franchise Action Network (FAN).  View the conference brochure here and information about the FAN here.

For a more detailed analysis of the General Counsel’s ruling, please read more below:

The General Counsel’s position, if upheld, would upend over 30 years of established law that a typical franchisor is legally distinct from its franchisees and cannot be treated as an employer of the franchisees’ workers.  A decision to uphold this position has the potential to dismantle the franchise business model and unsettle existing law.  We are working with many of the nation’s leading franchisors and will be closely monitoring developments as they unfold.

Since November 2012, a total of 181 charges have been filed against McDonald’s.  Of those charges, the NLRB has authorized 43 complaints against McDonald’s franchisees and McDonald’s USA as franchisor.  A significant number of the 43 authorized complaints originate in New York.

Griffin’s authorization of the joint-employer complaints is likely the first step of a multi-step and high-profile process that eventually will determine whether his position will carry the force of law.  Now that the NLRB has completed its initial investigation, the NLRB’s next step will be to issue formal complaints.  An NLRB administrative law judge will then conduct a hearing and issue a decision, which can be appealed to the five-member Board.  Any decision by the NLRB will be subject to appeal to a U.S. Court of Appeals and ultimately to the U.S. Supreme Court.  Significantly, NLRB decisions are not self-executing, and the NLRB must petition a U.S. Court of Appeals for enforcement.  This process will likely take several years with the NLRB’s decision not expected until the end of 2016. 

The General Counsel’s position has been heavily criticized.  Opponents assert that the result is politically motivated, not based in the law or economic realities, and driven by plaintiff’s lawyers in search of pockets deeper than the franchisee.  A finding that the franchisor is an employer of franchisees’ workers could also allow the workers of franchisees to unionize across the nation by bypassing the franchisees who employ them and pressuring McDonald's, USA directly. (Wall Street Journal, editorial, July, 31, 2014 and Wall Street Journal, op-ed, Andrew Puzder, July 31, 2014)  The Service Employees International Union, who filed a brief with the NLRB advocating this change in the law, has recently been assisting fast-food workers in their efforts to organize and lobby for a $15 minimum wage.  (See IFA’s statement on the NLRB’s actions here.)

Franchisors generally supply products, business processes, systems, and a well-known brand name.  While the system often includes requirements concerning positions and training of franchisee employees to ensure consistent standards and customer service experiences across units, franchisors do not control hiring, firing, compensation, and similar aspects of the employer-employee relationship.  Instead, in the typical contractual relationship, the franchisee—not the franchisor—independently controls its employees and alone sets wages, hires, fires, disciplines, and directs its workers.  This division of tasks is the hallmark of the franchise model, and demonstrates that the General Counsel’s position not only significantly departs from well-settled precedent, but also is wholly inconsistent with the parties’ contractual relationship and unsupported in economic reality.  If upheld, the General Counsel’s position could result not only in increased liability and risks for franchisors, but also in less autonomy for franchisees and an unsustainable shift in the economics of the relationship. 

The General Counsel has readily acknowledged that he is pursuing a radical change in the law.  In an amicus brief filed on June 26, 2014, in Browning-Ferris Industries of California, Inc., NLRB Case No. 32-RC-109684, which will likely reach a final decision before the McDonald’s cases, the General Counsel urged the NLRB to “abandon its existing joint-employer standard” and adopt a new test.  

  • The long-standing test for determining whether a franchisor is a joint employer asks whether the franchisor exercises significant, direct, and immediate control over the franchisee’s employment decisions (such as supervision, discipline, direction, hiring, and firing).  Under this standard, the NLRB must examine the actual practices of the parties.  
  • The General Counsel’s position would impose a very different test, finding joint-employer status whenever “under the totality of the circumstances, including the way the separate entities have structured their commercial relationship, the putative joint employer wields sufficient influence over the working conditions of the other entity’s employees such that meaningful bargaining could not occur in its absence.”  Browning-Ferris Indus. of Cal., Inc., Case No. 32-RC-109684, slip op. at 17 (N.L.R.B. June 26, 2014). 

If the General Counsel’s position carries the day, even franchisors with only potential indirect and limited control over a franchisee’s workers could arguably (and wrongly) be deemed a joint employer and liable for the franchisee’s labor practices.  The potential outcome could leave franchisors feeling compelled to micromanage the routine employment decisions of each franchisee in an effort to reduce liability risks under the new joint-employer standards, effectively undoing the benefits of the traditional franchise model in which franchisees have the right to independently control and operate their own businesses under an established brand and system.  Further, the effects would likely go beyond labor issues, potentially affecting vicarious liability standards under general tort actions as well as state taxation of franchisors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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