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Nightmare turns real for restaurant franchisors

Once in a great while, the monsters under the bed prove real. A frightener straight from Stephen King’s id roared up this week in Washington, D.C., validating one of chain restaurants’ worst fears and threatening to rip apart franchising as it currently operates.

The first victim would be McDonald’s Corp., which learned this week from the National Labor Relations Board that it can now be named a co-employer and co-defendant in legal actions brought against franchisees by their employees. The franchisor would technically be regarded as a “joint employer,” with an obligation to regulate the employment practices of franchisees in the same way a brand polices operational and trade dress standards.

Employees who feel they’ve been wronged while working in a franchised restaurant could seek redress against the deep-pocketed licensor as well as the store operator. 

If it sticks, the NLRB’s redefinition of a franchisor’s obligations would recast the relationship between a chain’s home office and its franchisees. Franchise contracts would have to incorporate much more sweeping obligations and standards, and new ways of enforcing stipulated employment practices would have to be implemented.

The NLRB’s decision in McDonald’s instance “overturns 30 years of established law regarding the franchise model in the United States, erodes the proven franchisor/franchisee relationship, and jeopardizes the success of 90 percent of America’s restaurants who are independent operators or franchisees,” Angelo Amador, the National Restaurant Association’s VP of labor and workforce policy, said in a statement.

Rob Greene, executive director of the National Council of Chain Restaurants, called the decision “wrong-headed” and a dampener on the growth of small business in America.

“The Obama Administration and federal agencies need to stop putting up hurdles to economic growth, and start working collaboratively with business owners on policies that enhance job creation in the communities that McDonald’s and other chain restaurants and small businesses owners serve each and every day,” he said.

McDonald’s said it would contest the preliminary reclassification by the NLRB. “This decision to allow unfair labor practice complaints to allege that McDonald’s is a joint employer with its franchisees is wrong,” Heather Smedstad , McDonald’s USA’s senior vice president of human resources, said in a statement. “McDonald’s does not direct or co-determine the hiring, termination, wages, hours, or any other essential terms and conditions of employment of our franchisees’ employees – which are the well-established criteria governing the definition of a ‘joint employer.’”

The NLRB’s decision came as employees of McDonald’s restaurants in several states were seeking class-action status in suits alleging their employers cheated them out of hours and pay. The suits were filed against McDonald’s Corp. as well as its franchisees.

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