General Counsel of the NLRB Opens the Door for Franchisors to be Liable for the Actions of their Franchisees

by Snell & Wilmer

In a directive that has rocked the franchise world, the National Labor Relations Board (NLRB or the Board) Office of the General Counsel determined that McDonald’s USA, LLC, as the franchisor, could potentially be held liable for the actions of its franchisees under the “joint employer” theory. The General Counsel’s decision has authorized numerous unfair labor practice complaints based on alleged violations of the National Labor Relations Act (NLRA) to potentially proceed against both the franchisor and franchisee entities.

According to the NLRB’s Office of Public Affairs, 64 cases are currently pending investigation and 43 additional cases have been found to have merit, potentially resulting in McDonald’s—the franchisor—being named in numerous ongoing matters relating to the franchisee entities. In total, McDonald’s has over 3,000 franchisees. With over 35,000 locations worldwide and more than 14,000 of those locations being in the United States, only a small fraction of the McDonald’s restaurants are company-operated.

This decision is consistent with an earlier amicus brief that was filed approximately one month ago on behalf of the NLRB General Counsel in Browning-Ferris Industries of California, Inc. The amicus brief argued that the Board “should abandon its existing joint employer standard” that finds joint employer liability when an employer exercises direct or indirect control over significant terms and conditions of employment of another entity’s employees and, instead, “adopt a new standard that takes account of the totality of the circumstances, including how the putative joint employers structured their commercial dealings with each other.”

Subjecting a franchisor to liability otherwise reserved for the franchisee-employers could potentially obliterate the heart of the franchise business model and affect businesses throughout the United States. Franchisors simply do not exert the level of control (or in many cases any control) over the franchisees’ employees’ terms and conditions of employment so that the franchisors would be considered “employers.” Until now, franchisors have not been involved in the run-of-the-mill disagreements among employees and the franchisees. If franchisors are suddenly brought into such disputes, as the General Counsel of the NLRB has suggested may occur here, it essentially eliminates one of the prime reasons a potential franchisor may choose to enter into the franchise model as opposed to just obtaining investors or lenders. Franchisors may be forced to exercise more control and, as a result, spend more money and provide more oversight of the day-to-day tasks of their franchisees. It chips away at much of the upside of the franchisor/franchisee relationship for the franchisor, and will arguably make it more difficult and costly for small business owners and individuals to become franchisees.

The directive really becomes a catch-22 for franchisors who, based on the presumption that they may be viewed as a joint employer, must now consider whether they need to exercise more control over the terms and conditions of the franchisees’ employees’ employment. Do they need to weigh in on wages, hiring decisions, terminations, disciplinary issues and other actions that are typically delegated contractually to the franchisees? And if the franchisors do those things, have the franchisors now perpetuated the argument that they now, in fact, should be treated as joint employers?

Jeopardizing franchisor/franchisee relationships is only the tip of the iceberg. There are also broader implications with this new guidance that extend far beyond the potential that franchisors may arguably be considered “employers” under the NLRA. It remains to be seen whether the NLRB will begin more actively pursuing “joint employer” cases against parent companies or corporations that would otherwise not have been included in the earlier definition of “employer” under the NLRA. It also begs the question as to whether other agencies, such as the Equal Employment Opportunity Commission or Department of Labor, will follow the NLRB General Counsel’s lead. For example, the issue of “joint liability” comes up in the context of the Fair Labor Standards Act (FLSA), which follows the “economic realities” test when determining liability for claims by subcontractors and independent contractors. The Family and Medical Leave Act (FMLA) addresses “joint employer coverage” in its regulations and identifies when two or more businesses may be considered joint employers under the FMLA. Similarly, many statutory and common law tests focus on the level of control an entity has over another company and/or that company’s employees. Accordingly, the issue of joint employer liability is important for any company to understand that utilizes temporary agencies, subcontractors, independent contractors, leased employees or operates any business model in which services or work is performed by entities or employees other than its own. It is essential because companies may be individually and jointly responsible for those entities’ compliance with the laws.

The investigation of the charges against McDonald’s franchisees is still ongoing. McDonald’s has issued a statement that it “will contest this allegation in the appropriate forum.” Procedurally, the next step will be for McDonald’s to address any complaints filed against it before an administrative law judge and, then, the issue could arguably go up to the full Board and even the Supreme Court. McDonald’s reiterated in its statement that it does “not direct or co-determine the hiring, termination, wages, hours, or any other essential terms and conditions of employment of [its] franchisees’ employees.” This is definitely one super-sized issue that will be making the headlines for a while.

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