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The Not-So Golden Arches Decision

On July 29, the National Labor Relations Board's (NLRB) Office of the General Counsel released a statement that McDonald's, Corp. can be held liable for the employment decisions made in its franchised outlets, which tally nearly 14,000 in the United States. Since 2012, 181 cases involving McDonald's and alleged workplace violations have been filed with the NLRB. Of these 181 cases, 43 cases have been found to have merit and will now proceed with McDonald's as a joint employer unless the parties can reach a settlement.

Under the traditional franchise model, the franchisor owns a system for operating a business (such as marketable products, proprietary methods, intellectual property rights, etc.) and local franchise owners pay fees in exchange for the right to use the corporate brand, produce the products or render the services within certain quality specifications, and participate in system-wide advertising, among other things. Importantly for purposes of this discussion, each franchisee typically handles the local employment matters.

Pursuant to the National Labor Relations Act, joint employers exist where two separate legal entities share the ability to control or co-determine essential terms and conditions of employment, such as hiring, firing, discipline, supervision and direction of employees. By naming McDonald's Corp. as a joint employer, the NLRB General Counsel has issued a deathblow to one of most fundamental principles of franchise law - the franchisees' ability to control employment-related matters and the franchisors' non-liability for them. The NLRB General Counsel is seemingly taking the position that if franchisors have comprehensive rules and standards for day-to-day operations, then they must also have strict control over employment practices, thereby making them liable for their franchisees' labor violations.

The NLRB General Counsel determination is just the first of many steps. McDonald's will have the opportunity to defend itself in an administrative hearing and, if necessary, appeal that decision to the NLRB Board. Even if the NLRB upheld a decision against McDonald's, it would require enforcement from a federal court.

Many commentators believe that this decision may be the first step in unionizing the fast food industry, but the implications are even broader. Franchising is not only the business method of choice in fast food, but also in numerous other industries, including hospitality, retail, and automotive. In addition, if the franchise model can lead to joint employer liability, so, too, can other business relationships that utilize non-employee arrangements to meet labor demands (think independent contractors, outsourcing, or temp agencies).

While it may be a long time before this issue is resolved, franchisors should examine the amount of control they currently have over franchisees' labor practices. A culture of compliance with state and federal law should always be promoted, but franchisors should avoid wielding too much control over labor-related practices and decisions. For example, employee handbooks should be issued from the franchisee, rather than the franchisor, to lessen any appearance of a joint-employer status.

All businesses should closely follow the McDonald's case to see how the franchise business model will stand in the wake of legal challenge. We will be closely monitoring the case as it proceeds and keep you informed of any updates on our blog.

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Thomas D. Flanigan is a member of McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Lexington, KY office. Mr. Flanigan specializes in the areas of entrepreneurial business, lending and commercial services and mergers and acquisitions. He can be reached at tflanigan@mmlk.com or 859-231-8780.

This article does not constitute legal advice.

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