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The National Labor Relations Board and Franchisors/Franchisees

Question:  I understand that the National Labor Relations Board (“NLRB”) is taking some action against franchisors and franchisees, arguing that franchisors and franchisees are jointly liable for employment practices of the franchisees.  Is there an update?

Answer:  Yes.  The franchise industry is under attack by the NLRB.  On December 19, 2014, the NLRB Office of the General Counsel issued complaints against McDonald’s USA, LLC (“McDonald’s”) and its franchisees relating to actions taken against franchisee employees who participated in nationwide fast food strikes. According to the NLRB, McDonald’s, 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, making McDonald’s a joint employer with its franchisees and responsible for sharing liability for violations of the National Labor Relations Act.

The NLRB’s position is concerning to the franchise industry, which generally seeks to avoid joint employer status by disclaiming any employment relationship and by leaving questions of wages and other terms and conditions of employment to the direct control of franchisees. According to the NLRB, McDonald’s (as a franchisor) exercises control over franchisee employees by among other things: 1) keeping track of sales, inventory, and labor costs; 2) calculating labor needs, work schedules, and hours; 3) retaining veto power over hiring and firing; 4) tracking wages and performance; 5) screening employment applications; 6) handling franchisee employee grievances; and 7) mandating shift length, authorizing overtime, setting safety rules or production standards, and approving vacation, holiday and leave time.

Although many may recognize a number of the above mechanisms as a form of brand protection, the NLRB views these mechanisms as excessive franchisor control, making franchisors joint employers with their franchisees of the franchisee employees.  If the NLRB is successful, franchisors could be deemed joint employers with their franchisees of the franchisee employees, which could lead to significant financial obligations to the franchisor of any liability that the franchisee experiences.  If the NLRB is successful, franchisors will likely forego certain practices, such as those listed above, to avoid the risk of being deemed a joint employer. This difficult position is bolstered by the fact that there is currently little to no affirmative guidance from the NLRB or the courts on this issue. Absent settlement, the McDonald’s hearings are scheduled to commence on March 30, 2015.

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