In a move that has caused great concern in the franchising industry, in pending cases filed by employees against McDonald's franchisees, the National Labor Relations Board (NLRB) has authorized the filing of complaints against the franchisor, McDonald's USA, LLC (McDonald's), as a joint employer respondent in addition to the franchisee employer.

Although the controversy is still at its earliest stages, the announcement is significant because the General Counsel's position is at odds not only with the NLRB's current standard for determining joint employer liability, but also with the basic structure of the franchise business model. One of the hallmarks of franchising is that franchises are independent businesses operated by a franchisee under a license from the franchisor. A standard provision in franchise agreements, including the version used by McDonald's, disclaims any agency, employee or joint venture relationship between the franchisor and franchisee. The franchisee's status is that of an independent contractor who maintains full control over the internal daily management of the franchised business.

The specific facts of these 43 cases have not been released so it is not possible to know the exact circumstances that led to the General Counsel's position. However, in Browning-Ferris Industries of California, Inc. (NLRB case 32-RC-109684), a non-franchise case currently pending before the NLRB, the General Counsel filed an amicus brief urging a new standard for joint employer liability. The arguments made in that brief provide some clues regarding the General Counsel's likely position on this matter in the context of franchising.

The General Counsel is urging the NLRB to return to a broader standard that could find that an entity was a joint employer "where it exercised direct or indirect control over significant terms and conditions of employment of another entity's employees; where it possessed the unexercised potential to control such terms and conditions of employment; or where 'industrial realities' otherwise made it an essential party to meaningful collective bargaining."

Comparing franchising to an outsourcing arrangement, the General Counsel claims that the franchise business model illustrates how the current NLRB joint employer standard undermines meaningful collective bargaining because such bargaining is limited by the inclusion of an intermediary (i.e. the franchisee) between the employer and its workers and designates the intermediary as the workers' sole employer. In particular, the General Counsel focuses on current technological advances used by many retail and restaurant businesses such as sophisticated POS systems that incorporate labor management, employee scheduling, and human resource recordkeeping components. The General Counsel argues that such technology allows a franchisor to exert significant control over its franchisees beyond the protection of the franchisor's brand and to the extent that the franchisor-franchisee relationship undermines meaningful collective bargaining. To resolve this problem, the General Counsel urges the NLRB to abandon its current standard and to return to a standard which would make no distinction between direct, indirect, and potential control over working conditions, and would find joint employer status where "industrial realities" make an entity essential for meaningful bargaining.

What does this mean for franchisors right now?

This controversy is at such an early stage, it is difficult to predict what, if anything, will happen regarding the standard used by the NLRB in determining joint employer liability. Even if some of the 43 pending McDonald's cases are not settled, the road from the issuance of a complaint to the imposition of a new standard by the NLRB and enforcement by the courts is a long and difficult one.

The position taken by the General Counsel in these cases is strongly opposed by the International Franchise Association, as well as members on key committees of both houses of Congress. Additionally, no decision in the Browning case has been reached, so it is not known whether the NLRB Board is persuaded by the General Counsel's arguments regarding a new standard for determining joint employer liability in any context. Resolution of this matter may be years in the future and for now, a prudent franchisor should consider this incident merely as a valuable reminder that the terms of the franchise agreement and system manuals should be reviewed from time to time to ensure that the franchisor is not exercising excessive control over the daily operations of its franchisees.

How can a franchisor reduce its potential liability in this area?

Although it is a difficult balance to maintain, franchisors must ensure that the control they exercise over franchisees through the terms of the franchise agreement and the policies found in system manuals is sufficient to protect brand standards and the intellectual property, but not so intrusive as to give rise to claims of joint employer status. Some areas in which a franchisor might want to review its practices include interaction between franchisor personnel and franchisees on field visits, its level of involvement in the daily operations of franchisee locations, the types of training provided by the franchisor, and the components included in required system technology.

Although field visits and quality assurance inspections of franchisee locations are common to ensure compliance with system standards, franchisors should remind their field personnel to rigorously avoid any involvement in a franchisee's direct employment practices, including recruitment, hiring, firing, payroll issues, or the review of employment records. When consulting with franchisees regarding best practices, field consultants certainly should feel free to provide training and guidance in areas where it is needed, but should not take over and directly supervise a franchisee's employees in the daily operation of the business. Training programs provided by the franchisor should focus on the franchisee and its senior managers, while encouraging the franchisee to provide direct training to its lower level employees.

Given the General Counsel's focus on franchisor-provided technology, franchisors may wish to reevaluate the types of software they require their franchisees to use, particularly avoiding any components that mandate certain scheduling or payroll requirements or that provide the franchisor with access to employment records for the franchisee's employees. Finally, franchisors should review their enforcement policies and practices to ensure that the provisions of the franchise agreement which emphasize the independent contractor relationship between the parties are being followed by the franchisees, including the use of conspicuously posted notices that the franchise is an independently owned and operated business and prohibitions against franchisees using the franchisor's name or trademarks in its own corporate name or in other ways that may give the impression to employees or customers that the entities are related.

While there is no reason for panic, the recent announcement from the Office of the General Counsel has reminded franchisors that they must be vigilant in analyzing the specifics of their franchise agreements and practices in order to keep the relationship between franchisor and franchisee clearly that of licensor and license and nothing more.