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Question:  I am hearing a lot of talk about the McDonald’s case at the National Labor Relations Board.  What is going on and should I be worried?

Answer:   On July 29, 2014, the National Labor Relations Board (NLRB) general counsel announced that he is authorizing complaints in 43 unfair labor practice cases which allege that McDonald’s USA, LLD (the franchisor of the McDonald’s system) is a joint employer with its franchisees. If true, this means the McDonald’s franchisor would be liable for all the employment liability of its franchisees because they are “joint employers.”  For example, the franchisor could be found liable for the franchisee’s unfair labor practices (discrimination, etc.), or wage and hour violations (failure to pay overtime or minimum wage). 

Traditionally, franchising has been a growth strategy specifically designed to avoid this type of liability.  A franchisor plans a system for the franchisee to use, but the franchisee’s business is separate and owned by the franchisee.  All the employment liability has traditionally remained with the franchisee, since the business is run by the franchisee.  If McDonald’s franchisor is found to be a joint employer with its franchisees, it could have a significant impact on the franchising industry. 

The courts have traditionally analyzed joint employer relationships with a test looking into whether the joint employer (franchisor) exerts a direct and immediate degree of control over the essential terms and conditions of employment, such as hiring, firing, discipline, supervision, and direction.  Under this evaluation, franchisors have not been found to be joint employers.  However, the NLRB general counsel is encouraging the NLRB to adopt a new test determining the existence of a joint employer relationship.  He argues the test should be that “under the totality of circumstances, including the way the separate entities have structured their commercial relationship, the joint employer wields significant influence over the working conditions of the other entity’s employees.” 

Although not adopted by the NLRB or the federal court system, franchisors should be aware of the undercurrent at the NLRB and its general counsel.  Franchisors should also carefully review their existing systems designed to monitor franchisee conduct in order to determine the degree to which the franchisor wields significant working conditions of its franchisees’ employees.