NLRB Decision Shocks Franchise World: McDonald’s, A “Joint Employer” of Franchisee Employees

Tuesday, September 23, 2014 - 10:43

The franchising world was shocked this summer.  A short announcement on July 29, 2014, from the National Labor Relations Board’s (“NLRB”) Office of the General Counsel (“OGC”) sent ripples through the franchising world.  The announcement read, in part:

The National Labor Relations Board Office of the General Counsel has investigated charges alleging McDonald’s franchisees and their franchisor, McDonald’s, USA, LLC, violated the rights of employees as a result of activities surrounding employee protests.  The Office of General Counsel found merit in some of the charges and no merit in others.  The Office of the General Counsel has authorized complaints on alleged violations of the National Labor Relations Act.  If the parties cannot reach settlement in these cases, complaints will issue and McDonald’s, USA, LLC will be named as a joint employer respondent (emphasis added).

This OGC’s decision was made in an internal (unpublished) advice memorandum regarding 43 cases accusing McDonald’s franchisees, and McDonald’s itself, of violating the rights of franchisee employees regarding protests.  This decision applies only to the filing of the 43 cases referenced above.  Ultimately, the NLRB will decide in the context of these 43 cases, if any go forward, whether to agree with the OGC or not.  Even if the NLRB agrees, the decision will undoubtedly be appealed through the courts.  If upheld, franchisors will face liability for labor rights claims, and possibly other claims such as tort liability for acts by franchisee employees, employment compensation or benefits claims, and more.  There is no doubt that such a change would fundamentally change the franchising world.  Indeed, one franchisor executive, in response to the announcement, the CEO of Firehouse of America, Inc., commented that there is “a very real possibility that franchising as we know it comes to an end” if this decision is upheld.

Franchisees and franchisors operate as separate and independent businesses.  Franchisees pay a fee, and typically a royalty or other compensation, for the use of the franchisor’s trademarks and marketing system.  In the case of McDonald’s, franchisees pay McDonald’s to use its world famous iconic trademarks and franchise system, which is renowned for product uniformity at every McDonald’s restaurant.  While franchisors provide the trademark and franchise system, franchisees operate franchised locations.  A franchise system usually includes franchisor-provided manuals detailing how a franchisee should operate its franchise, including the best way to staff a franchise or define job responsibilities.  Franchisees typically appreciate this level of support from their franchisor so that they do not need to do it themselves.  There are certain efficiencies that are gained in the franchise system by having a common set of operating procedures.  None of this should affect whether a franchisor is considered a “joint employer” or not.

Franchisees hire and fire their employees.  Franchisees run their business as their own subject to guidelines provided by the franchisor.  Thus, courts and the NLRB have typically found that franchisors are not joint employers of franchisee employees absent unusual circumstances.  Although the OGC announcement is not binding on the NLRB, the NLRB typically follows the advice of its OGC.  It is likely that, if upheld, this determination will be appealed, at the appropriate time, through the courts and ultimately to the U.S. Supreme Court, since it is a significant departure from current case law.

A franchise is a business opportunity that offers independent people or entities the opportunity to operate a business using the trademarks and business methods of a franchisor.  For decades, many business people and entrepreneurs have invested their savings and efforts to pursue a successful franchise.  Franchisees choose the franchise model because it brings instant credibility to the franchisee through the use of the franchisor’s trademark and franchise system.  Both franchisors and franchisees have an expectation that they are separate and independent businesses.  Typically, franchisors provide guidance to their franchisees to protect their trademarks and system.  In the franchise model, franchisors do not have the power to hire or fire franchisee employees, discipline franchisee employees or pay them for their services. 

To be certain, franchisors and franchisees have the expectation that they operate separate businesses.  Franchisors expect that they will provide trademarks and the “franchise system” that a franchisee uses to make money.  Franchisees, often entrepreneurial business people, expect to be able to run their business and, perhaps, fulfill a lifetime dream of owning their own business.  Most franchisee agreements reflect these expectations and typically provide that the franchisor is not the employer of any of the franchisee’s employees.

If this decision is upheld by the NLRB and the courts, it will greatly impact the dynamics of the franchise relationship.  The cost of doing business as a franchisor will increase as it faces additional liability as a joint employer of franchisees’ employees.  Franchisors will undoubtedly re-evaluate whether or not the franchise model suits their business objectives.  Many franchisors today have networks that are made up of franchises and company-owned stores.  Indeed, according to McDonald’s website, over 80 percent of McDonald’s restaurants are franchised with the balance being McDonald’s owned and operated.  After evaluating the franchise model, each franchisor may decide that it is less costly and more certain to operate company-owned retail locations, rather than franchise its system.

Unions have been lobbying the NLRB for years to revise and expand the concept of a “joint employer.”  Unions are doing this because, heretofore, they have had a hard time unionizing food services employees and other franchise workers.  If franchisors are joint employers, unions will be able to coordinate union organizing activities at the franchisor level rather than at the franchisee level.  Given the large size of McDonald’s franchise system, this will save the unions considerable money and time.  The International Franchise Association is mounting a challenge to this decision.  In a press release issued on July 29, the IFA’s president and CEO, Steve Caldiera, CFE, described the OGC’s decision as “[d]estroying the fundamental tenets of the franchise model” and having the effect of “eviscerate[ing] the most successful business model in existence.”  It is expected that the franchising community will rally to oppose this decision.

Given that the OGC advice memorandum was not publicly released, it is difficult to  divine what if any legal bases were cited in support of the decision.  The typical joint employer analysis (in the context of Fair Labor Standard Act cases) focuses on four factors, including the power to do the following:

  1. hire and fire employees;
  2. supervise an employee’s work schedule and work conditions;
  3. determine rate and method of compensation; and
  4. maintain employment records.

See e.g., Olvera v. Bareburger Group, LLC, No. 14-CV-1372, 2014 U.S. Dist. LEXIS 94401, at *12 (S.D.N.Y. July 10, 2014); Reese v. Coastal Restoration & Cleaning Servs., No. 1:10-CV-36, 2010 U.S. Dist. LEXIS 132858, at *8-14 (S.D. Miss. Dec. 15, 2010).  Based on these factors, it is difficult to see how McDonald’s would satisfy any of these factors at a franchised location.

There is a continuum of possible franchisor interactions with its franchisees that could be evaluated to determine whether a franchisor is a joint employer.  Some of these actions will clearly fall outside of conduct that would lead to a joint-employer finding.  For example, franchisors create menus and products for franchisees to sell, franchisors select locations for franchisees, and franchisors develop approved signage for the franchisee to use.  These types of franchisor actions have nothing to do with a franchisee’s employees and should not bear on the joint-employer decision whatsoever.  On the other end of the spectrum, a franchisor could help a franchisee run its franchise by screening applicants for employment.  Obviously, this activity runs very close to satisfying at least one element of the “employer” test discussed above.  However, there are other activities that fall in the middle of the continuum.  A franchisor might visit a franchisee location and notice that an employee violates a franchise standard – such as the way to properly cook french fries.  If the franchisor pulls the employee aside and corrects the employee, has the franchisor “supervised” the work conditions of employees?  Arguments can be made both ways.  The franchisor seeking to avoid joint-employer status would argue that it is simply trying to maintain franchise standards as required by the franchise agreement.  A plaintiff’s lawyer seeking joint-employer status would argue that the franchisor was supervising the work conditions of the employee.

There are some steps franchisors may consider taking to minimize the possibility that it will be found to be a joint employer by the NLRB, or a court seeking to expand concept of a joint employer.  Of course, given the current atmosphere and the lack of a stated legal justification for the OGC’s decision, there is no guarantee that any of these steps will insulate a franchisor from joint-employer status.  Possible steps include:

  • Review franchise agreement and operations manuals to assess current degree of control or perceived control of franchisee employees.  If possible, modify to the extent necessary to reduce or eliminate arguments that franchisee’s employees are controlled by the franchisor.
  • Franchisors should avoid contact with franchisee’s employees during site visits.  Franchisors should avoid involvement in any type of human resource issue regarding a franchisee’s employees.
  • Consider requiring franchisees to indemnify franchisors from franchise employee claims.  Franchisees will undoubtedly not want to do this, but they may feel compelled to do so rather than let franchisors retrench from the franchise model.

Again, it is possible that this decision will not be upheld by the NLRB or the courts.  It is possible that Congress will weigh in and enact legislation to decide this issue.  In either case, it will take a few years before there is clarity.  There is a slippery slope problem with the OGC decision, too.  Where does the NLRB stop?  Motor vehicle manufacturers should be concerned that the NLRB’s OGC will find that a car manufacturer is the “joint employer” of a dealer’s employees.  At a minimum, this issue bears watching by franchisors and franchisees alike.

Louis S. Chronowski is a Member in Dykema Gossett’s Chicago office.  Mr. Chronowski is a commercial litigator who focuses his practice on franchise and dealer disputes, trade secret and non-compete disputes and intellectual property litigation. 

 

Please email the author at lchronowski@dykema.com with questions about this article.