NLRB GC’s McDonald’s Ruling May Have “Super-Sized” Consequences

In an announcement that sent shockwaves through the business community this summer, the General Counsel of the National Labor Relations Board (“NLRB”) determined that McDonald’s, USA, LLC, the parent company of the McDonald’s franchise, was a “joint employer,” along with its franchisees, for purposes of liability under the National Labor Relations Act (“NLRA”) and, as a result, would be named as a co-defendant in at least 43 pending NLRB cases.  For decades, franchisors have relied upon existing “joint employer” law, including under the NLRA, to disclaim responsibility for alleged labor violations committed by their franchisees on the ground that they do not exert “direct and immediate” control over their franchisees’ employees. This critical legal protection for franchisors has enabled the franchise business model in the United States to flourish over the past forty years.

While the General Counsel’s decision does not yet formally change the law in this area, the announcement was made shortly after the NLRB invited briefs this past May from interested parties concerning whether the current standard for “joint employer” status should be changed.  Numerous amicus briefs were submitted in response to that request, including from the NLRB’s General Counsel.  In an amicus brief filed on June 26, 2014, the General Counsel urged the NLRB to “abandon its existing joint employer standard” and adopt a new test finding joint-employer status whenever “under the totality of the circumstances . . . the putative joint employer wields sufficient influence over the working conditions of the other entity’s employees such that meaningful bargaining could not occur in its absence.”

If the General Counsel’s position were to prevail, franchisors that exercise “indirect” or even “potential” control over a franchisee’s workers could be deemed joint employers and, thus, be on the hook financially for labor violations committed by their franchisees, including in cases where they have no specific involvement in or knowledge of the alleged violations. Both franchisors and franchisees also could find themselves sharing responsibility for labor negotiations, with the franchisor’s “deeper pockets” being relevant to that bargaining. As a result, unions may insist upon greater economic demands in bargaining than would otherwise be the case if the franchisee were the sole employer.

It also is possible that franchisors, in response to these changes, may decide that it is necessary to micro-manage employment decisions at the franchisee level, in an effort to reduce their own risk of liability. Franchisors might also require their franchisees to contractually indemnify them against any liability arising from labor law violations. While operational and contractual protections of this type may be essential for franchisors going forward, they could impose significant new costs and risks on their franchisees. Meanwhile, prospective franchisees may decide to avoid the franchise model altogether, given the increased costs and legal uncertainties in this area.

Although it is too soon to know for certain what results would follow from a reclassification of franchisors as joint-employers, it is fair to say that if the General Counsel’s position were adopted by the NLRB, it would likely cause significant change to the franchise business model in the United States. We will continue to monitor NLRB decisions in this area and update readers with any developments as they become available.