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The Potential Impact of the NLRB’s Position that McDonald’s Franchisees are Joint Employers

The National Labor Relations Board created a stir last week when it announced that it intends to hold McDonald's USA responsible for its franchisees’ violations of employment law. The announcement has created concern and consternation among businesses that operate as franchises, as well as those that use or provide or utilize temporary employees or independent contractors.

The NLRB's announcement is drawing significant attention because it could have wide-ranging implications, but it is important to keep in perspective that the announcement does not represent a binding or final determination. NLRB has stated a position that it intends to hold McDonald's USA responsible for its franchisees' unlawful employment practices. But no court or administrative judge has ruled in support of that position. Nevertheless, it indicates an aggressive application of the "joint employer" theory that, if adopted, could change the franchising landscape, especially in the restaurant, temporary staffing, and construction industries.

NLRB’s Announcement

The NLRB revealed that employees have filed 181 cases involving McDonald's restaurants in the past eighteen months. The cases involve a variety of complaints, including hours, wages, working conditions, and unfair labor practices relating to union organizing activity. Of those cases, 64 remain under investigation and 43 will proceed under NLRB's dispute resolution process after an initial showing of merit.

Historically, the law generally insulates franchisors from the acts of their franchisees. Courts have typically considered franchisees as separate and independent businesses from their franchisor; therefore employees could seek remedies for a franchisee’s employment law violations against only the franchisee. So for the 43 McDonald’s cases currently before NLRB, the employees would traditionally have a potential recourse against only their franchisee employer.

The NLRB signaled a departure from this practice last week. On July 29, 2014, NLRB announced that if the parties to the 43 pending cases are unable to reach a settlement, the NLRB will name both the franchisee “and/or McDonald’s USA, LLC” as parties in the proceeding. (McDonald’s USA, LLC is an operating subsidiary of McDonald’s Corporation). In response to the NLRB’s position, McDonald's stated that it "believes that this decision changes the rules for thousands of small businesses, and goes against decades of established law regarding the franchise model in the U.S."

The NLRB would have to produce evidence and obtain a favorable ruling from an administrative law judge that the franchisor was indeed a joint employer with its franchisees. That determination would, in all likelihood, focus on the level of control and influence McDonald's USA has over its franchisees' employment policies and practices.

Potential Impact of NLRB’s Announcement

It is unclear whether the NLRB will take a similar position with respect to all franchise businesses, or whether its position is limited to the McDonald's proceedings. A few factors unique to McDonald's may have motivated the NLRB’s decision. First, the NLRB emphasized the high number of complaints that employees have lodged against McDonald's. By involving the corporate franchisor, the NLRB may seek to increase its leverage to streamline the employment practices across McDonald’s franchisees. Second, the NLRB also noted the level of control that McDonald's has over its franchisees' business operations. McDonald's has always maintained—and the NLRB does not appear to contest—that its franchisees have discretion and authority to set wages and determine working conditions such as schedules and break times. But labor organizers have argued that the corporate entity should bear some responsibility for its franchisees' employment practices because McDonald's exerts so much control over its franchisees with respect to menu, marketing, décor, uniforms, and pricing. In other words, according to some commentators, McDonald's should not be permitted to reap the benefits of detailed control over its brand image, while off-loading liability for employment matters to its franchisees.

The full impact of this decision remains to be seen. While it is not yet binding precedent on any courts of law or even NLRB proceedings, it could encourage more employees and labor groups to bring charges or complaints with the NLRB against companies that operate under a franchise model. Employees and labor groups may seek opportunities to put both entities on the hook for alleged unfair labor practices—with the NLRB’s support for their position—thereby encouraging more complaints.

In addition, the NLRB’s position should encourage franchisors to carefully reevaluate how much control and influence they exercise over their franchisee's employment practices and policies. The more control and influence that the franchisor has over its franchisees' employment relationships, the more likely it is that the franchisor may be considered as a joint employer. If courts adopt NLRB's position, it could (a) take away one of the significant advantages that businesses consider when deciding whether to adopt a franchise model; (b) change the dynamics and level of interaction and control between franchisors and franchisees; and (c) provide for increased unionization across all franchisees.  Finally, this could extend beyond franchise businesses and have implications for businesses that provide or use temporary employees or independent contractors, because many of the same "joint employer" considerations apply in those contexts as well.

This issue is, no doubt, one that employers (especially those in the restaurant, staffing, and construction industries) should monitor with keen interest. Companies should assess potential implications on their business operations and be prepared to take corrective action in order to minimize the risk of being considered a "joint employer" with another entity.