BY JULIE LUSTHAUS
In December 2014, the National Labor Relations Board issued complaints against McDonald”™s USA LLC (and some of its franchisees), alleging that McDonald”™s (and the franchises) violated the rights of restaurant employees. If these complaints are successful, McDonald”™s will essentially be deemed a joint employer with its franchisees.
- Julie Lusthaus
According to the NLRB”™s website, it determined that McDonald”™s USA, “through its franchise relationship and its use of tools, resources and technology, engages in sufficient control over its franchisees”™ operations, beyond protection of the brand, to make it a putative joint employer with its franchisees.” Until now, McDonald”™s and other companies that make wide use of expansion through franchising have been insulated from such liability under the NLRB”™s previous definition of what constituted a joint employer.
No surprise, McDonald”™s was disappointed with the NLRB”™s decision to issue the complaints and has stated on its website that it will contest the joint-employer allegation as well as the unfair labor practices charges in the proper forums. McDonald”™s further stated that it believes that the allegations are “driven in large part by a two-year, union-financed campaign that has targeted the McDonald”™s brand and impacted McDonald”™s restaurants.”
Many franchise industry experts and trade groups such as the International Franchise Association oppose the NLRB”™s actions, saying treating franchisors as joint employers undermines a longtime business model that recognizes franchisees as independent business owners. Traditionally, franchisors have exerted sufficient control over the operations of their franchises to protect the brand and ensure system consistency. When a franchisor crosses the line, it can be deemed to be a joint employer as the NLRB has suggested McDonald”™s has done.
If McDonald”™s is deemed the joint employer of its franchisees”™ employees, McDonald”™s corporate could be held liable for wrongdoing by its franchisees and additional consequences will likely follow for the franchise industry. Franchisors may become more hesitant in selling unit franchises to individuals with little or no management experience, preferring to only contract with large multi unit developers. Small investors would have limited opportunities to own franchised businesses, which has been one of the greatest attributes of franchising. In addition, startup franchisors may be reluctant to expand through franchising.
It is a big undertaking for a successful brand to become a successful franchise system. At the early stages of franchise development, the franchisor”™s resources are expended on training franchisees on system standards and ensuring operations are turnkey. If the risk of joint employer status and liability is too high, companies may be unwilling or unable to franchise, choosing instead to expand by opening additional company units.
Further, findings of joint employer status could open the floodgates to claims against franchisors in civil litigation by third parties such as franchisee customers.
Franchisors must be mindful to not exercise excessive control over franchisees”™ business operations. The first step is to review or have counsel review the company”™s franchise documents to ensure that the franchisor is only asserting as much control over its franchisees as is necessary to protect the brand. Franchisors should make clear in their franchise agreements (and otherwise) that the franchisees are independent business operators with sole responsibility for soliciting, hiring, firing and managing their own employees. Franchisors should ensure that franchisees are required to, and do, post a sign that conspicuously indicates that the franchise is independently owned and operated. Franchisors should also ensure that franchisees are not using the franchisor”™s trademarks in their corporate names. All letterhead and agreements used by franchisees, including payroll and other employment agreements, should indicate the franchisee”™s corporate name so that employees will see the name of their employer. Franchisors may also want to consider having their insurance advisers review the insurance policy requirements for franchisees to help protect franchisors from potential losses.
One thing is for certain, this fight is far from over. Franchisors should watch carefully as these cases develop and proceed through administrative and possibly court hearings.
Attorney Julie Lusthaus is a partner in the firm of Einbinder & Dunn LLP. She can be reached by phone at 914-664-8040 and via email at jcl@ed-lawfirm.com.
