Alert: NLRB Decides to Prosecute Franchisor McDonald's

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August 1, 2014

NLRB Decides to Prosecute Franchisor McDonald's For Alleged Unfair Labor Practices As a "Joint Employer" of Franchisee's Employees

On July 29, 2014 the Office of Public Affairs of the  National Labor Relations Board (NLRB) issued a press release indicating that the General Counsel of the NLRB would pursue 43 unfair labor practices cases against both individual McDonald’s franchisees and the franchisor, McDonald’s. The press release stated that McDonald’s would be “named as a joint-employer respondent.”

In the wake of this press release, it has been widely reported that the NLRB ruled that franchisors could be liable for the unfair labor practices of their franchisees. This is incorrect - there has been no ruling or decision by the NLRB. What was announced on July 29, however, is the intention of the NLRB’s enforcement arm to assert that McDonald’s has liability as a joint-employer for the alleged unfair acts of its franchisees. Those cases will be tried before an NLRB Administrative Law Judge. Those decisions then could be appealed to the full five-member NLRB, whose decision then could be appealed to a Federal Circuit Court of Appeals. Therefore, an actual, final “decision” on these specific cases is several steps, and most likely at least a year, away.

The NLRB general counsel's office decision to litigate indicates a change in direction by that office and if successful, will have significant ramification for franchisors. The NLRB’s decision to assert liability for unfair labor practices against a franchisor follows positions taken by the office of the general counsel in an amicus brief submitted in an NLRB action, outside of the franchise context, in late June 2014, Browning-Ferris Industries of California, Inc., d/b/a BFI Newby Island Recycling & FPR-II, LLC, d/b/a LeadPoint Business Services & Sanitary Truck Drivers and Helpers Local 350, International Brotherhood of Teamsters, Case 32-RC-109684. In that amicus brief, the general counsel’s office urged the NLRB to adopt a new, less restrictive standard for determining joint-employer status. The general counsel’s office criticized the existing joint-employer test of “whether a putative joint-employer’s control over employment matters is direct and immediate” as inhibiting meaningful collective bargaining. In support of this position, the amicus brief devoted over two pages to a discussion of franchising, stating that “[f]ranchising … also illustrates how the current joint-employer standard undermines meaningful collective bargaining.” The NLRB general counsel’s office asserted that franchisors “can exert significant control on the day-to-day operations of their franchisees,” including controlling the number of workers and the hours each employer works. It concluded that “some franchisors effectively control such wages” paid by their franchisees. Although most franchise systems, and their counsel, might strenuously object to these conclusions, going forward it will be important for franchisors to strive for clarity on what they do and do not influence and control concerning their franchisee’s labor decisions. The amicus brief also charged that “some scholars have posited that franchisors consider avoidance of unionization and the collective bargaining process to be the ‘prime advantage of franchising.’” Many of the assertions and assumptions offered by the NLRB general counsel likely will be hotly contested in the McDonald’s cases, and franchisors should consider taking steps now to be in a position to respond to and contest them.

It is likely that the NLRB will attempt to apply the joint-employer test it proposed in its Browning-Ferris amicus brief against McDonald’s, and other franchisors in the future. The proposed, more liberal test for “joint-employer” status asks whether:

Under the totality of the circumstances, including the way the separate entities have structured their commercial relationship, 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.

This test, if applied, contains what appears to be a fairly subjective and fact specific test of whether the franchisor “wields sufficient influence … such that meaningful bargaining” could not occur without the franchisor. If this test is adopted, it could result in several years of uncertainty as these subjective standards are clarified through NLRB and court rulings.

Franchisors often face allegations of vicarious liability for the actions of their franchisees and their franchisees’ employees. These vicarious liability issues recently were addressed in Briggs' Franchise, Antitrust, Distribution and Dealer summer newsletter. The NLRB press release of July 29 presents yet another risk of potential franchisor liability stemming from too much control over franchisees. The press release indicates that the issue of whether, and under what factual scenarios, a franchisor will be alleged to be a “joint-employer” for labor law purposes will be a focus, at least in the short term, of NLRB enforcement actions. Resolution of that issue, however, remains unclear and will need to be monitored by franchisors and their counsel.