The Office of the General Counsel of the National Labor Relations Board (NLRB) issued 13 complaints, on December 19, 2014, against McDonald’s franchisees and their franchisor, McDonald’s USA, LLC (McDonald’s USA), involving alleged labor law violations.  The complaints follow the NLRB General Counsel’s announcement in July 2014 that the NLRB would seek to hold McDonald’s USA liable as a “joint employer” for unfair labor practices committed by its individual franchisees.  More information about the General Counsel’s prior announcement is available here. 

NLRB’s Complaints Against McDonald’s

The 13 complaints allege that certain McDonald’s franchisees violated the rights of their employees by, among other things, making statements and taking actions against them for engaging in activities aimed at improving their wages and working conditions, including participating in nationwide fast food worker protests during the past two years. 

The complaints provide little detail about the NLRB’s basis for asserting joint employer liability against McDonald’s USA.  They simply note that McDonald’s USA had a franchise agreement with each franchisee and declare, without elaboration, that McDonald’s USA “possessed and/or exercised control over the labor relations policies of [such franchisee] at the Restaurant.” 

In a separate “McDonald’s Fact Sheet” posted on its website, the NLRB claims 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” sufficient to share liability for its franchisees’ violations of the National Labor Relations Act.  The NLRB claims its finding is supported by McDonald’s USA’s nationwide response to fast food worker protests. 

In response to the complaints, McDonald’s USA posted a statement on its website saying the NLRB’s actions “improperly and dramatically strike at the heart of the franchise system – a system that creates economic opportunity, jobs and income for thousands of business owners and their employees across the country.”  The company continued, “McDonald’s [USA] is disappointed with the Board’s decision to overreach and move forward with these charges, and will contest the joint employer allegation as well as the unfair labor practice (ULP) charges in the proper forums.” 

“A Radical Change in the Law”

The General Counsel has readily acknowledged that he is seeking a radical change in the law regarding joint employer liability.  The long-standing test for determining whether a franchisor is a joint employer asks whether the franchisor exercises significant, direct, and immediate control over the franchisee’s employment decisions, such as supervision, discipline, scheduling, hiring, and firing.  Under this standard, the NLRB must examine the actual practices of the parties.  However, in an amicus brief filed on June 26, 2014, in Browning-Ferris Industries of California, Inc., NLRB Case No. 32-RC-109684, the General Counsel urged the NLRB to “abandon its existing joint-employer standard” and adopt a new test that focuses on whether the putative joint employer “wields sufficient influence” over the working conditions of the other entity’s employees.  Under the General Counsel’s position, joint employer status could be found by evidence of direct control, indirect control, unexercised potential for control, or industrial realities that give one company significant influence over the terms and conditions of the other company’s employees.  This amicus brief provides guidance as to the General Counsel’s joint employer legal theory behind the new complaints it filed against McDonald’s USA.  Browning-Ferris will likely reach a final decision before the McDonald’s USA cases do. 

Next Steps—Litigating the Claims Against McDonald’s USA

Unless settled first, the charges against McDonald’s USA and its franchisees will be litigated before NLRB administrative law judges across the country beginning on March 30, 2015.  The outcome of those proceedings may be appealed to the five-member labor board, then to a federal circuit court of appeals, and ultimately to the U.S. Supreme Court.  Thus, it will likely be months or years before franchisors know whether the General Counsel’s efforts to rewrite the joint-employer standard will be successful and, if so, what kind of franchisor conduct or influence would satisfy the new standard. 

If the General Counsel’s position carries the day, then even franchisors with only indirect and limited control over a franchisee’s workers could arguably be deemed the joint employer liable for the franchisee’s labor practices, which, as noted above, would represent a major alteration of long-standing legal standards.  This likely would force changes to the contractual relationship between franchisors and franchisees.  Among other things, the potential outcome could compel franchisors to micromanage the routine employment decisions of each franchisee in an effort to reduce liability risks under the new joint-employer standards, increasing franchisors’ costs and effectively undoing benefits of the traditional franchise model in which franchisees have the right to independently control and operate their own businesses under an established brand and system.  Further, the effects could go beyond labor issues, potentially affecting vicarious liability standards under general tort actions as well as state taxation of franchisors.

Precautions for Franchisors to Minimize Liability

Although the results of the McDonald’s USA cases will not be known for some time, there are steps a franchisor can take to minimize its risk of being declared a joint employer of its franchisees’ employees under the current test, as well as potentially under any new test.  These steps will also reduce the risk of a finding of common law vicarious liability for a franchisee’s employment practices in most states:

1. Franchisors should make clear in their franchise agreements and other documentation, including manuals and handbooks, that franchisees are solely responsible for all employment and personnel matters, including soliciting, hiring, firing, scheduling, and managing their own employees.  Franchisors should expressly disavow control over employment and personnel matters and decisions. 
2. Franchisors should, in practice, implement only those controls necessary to protect the goodwill of the brand.  While franchisors can (and should) implement controls over trademark, advertising, quality control, and unit appearance issues, franchisors should avoid control over personnel policies or actions, including the hiring, firing, disciplining, and scheduling of the franchisee’s employees.  Similarly, franchisors should be wary of technology that allows a franchisor to monitor, and potentially intervene in, employee scheduling issues in real time.  
3. Franchisors should take steps to ensure that the franchisee’s employees, and general public, know they are employed by the independent franchisee and not by the franchisor.  For example, franchisors should require franchisees to place conspicuous signage stating that the unit is independently owned and operated.  In addition, franchisors should prohibit franchisees from using the franchisor’s name or marks in the franchisee’s corporate name or in employment-related documents, such as applications, employment agreements, evaluations, etc.  If a franchisee imposes a personnel handbook on its employees, then the franchisor should request that the handbook expressly states that the worker is an employee of the franchisee—not the franchisor—and that the franchisor does not exercise control over the employee’s performance of duties, scheduling, or other conditions of employment.
4. Franchisors should limit interactions with a franchisee’s non-management employees.  When conducting inspections and site visits, the franchisor’s personnel should review operations only with the franchisee or its manager.  The franchisor’s personnel should give directions or suggestions directly to the franchisee’s owner or manager and not to its employees.

© 2015 Perkins Coie LLP