New ruling opens franchisors to legal liability for franchisees’ employment practices

In what franchisors have declared a critical blow to their business models, the National Labor Relations Board has decided that McDonald’s can be held accountable for the labor policies and practices of its franchisees.

The decision in effect reclassifies franchisors as joint employers of franchisees’ staffs, opening the home office to labor-related lawsuits and complaints brought against any store in the system. In the potentially precedent-setting situation with McDonald’s, the NLRB is pursing 86 complaints against the corporation and franchisees in various states, with 71 more complaints still being investigated.

“This is the nightmare before Christmas,” said Robert Cresanti, executive vice president of government relations and public policy for the International Franchise Association. “It opens up the possibility of a deep-pocket lawsuit for all [franchisor] brands.”

Instead of suing franchisees, who are almost always smaller than their franchisor, employees who feel they’ve been wronged can go after a bigger payoff from the parent corporation.

The decision by the NLRB reverses one of the fundamental aspects of franchising: Recruitment, hiring and ongoing employment policies are left entirely to the discretion of franchisees. That practice has not only been a longstanding tradition of franchising, but also the legally accepted standard, established in a 1968 legal ruling.

The standard reflected the realities of the business model, said David French, senior vice president of government relations for the National Retail Federation. “The franchisor does not want to be involved in the hiring decision because they are not as close to the local market conditions,” he said during a conference call convened by several trade associations for highly franchised industries. “That’s why the decision from the NLRB is so confusing and different from the reality of what the business is all about.”

If the NLRB decision stands and franchisors are held responsible for the labor practices of franchisees, the use of franchising as an expansion method will grind to a halt, warned the IFA’s Cresanti. “Because it disrupts that relationship in the way that it does, it creates uncertainty and increased risk for franchisors,” he explained. “It makes them hesitant to open new businesses because it loads risk onto their balance sheet if they do business with new people with whom they’re not familiar.”

He expressed no doubts that the decision and the NLRB’s timing was influenced by political considerations. At least some of the complaints that will be brought against McDonald’s and its franchisees relate to the walkout by employees earlier in the year. Those and other labor demonstrations were organized by unions hoping to organize restaurant chains. Some participants claim they were subjected to retribution for their activities in violation of labor laws. 

The NLRB had alerted McDonald’s during the summer that it might reverse longstanding legal precedent and regard the franchisor as a joint employer of franchisees’ staffs. A more definitive decision has been anxiously awaited since that time.

The finding by the NLRB came while Congress is in recess and many government institutions are running at half-throttle because of the year-end holidays. “The timing of this decision is no coincidence,” remarked Cresanti. “It is a devastating blow to this industry.”

He and the other participants in this afternoon’s conference call said their groups would do everything in their power to thwart the designation of franchisors as joint employers. They cited the possibility of lawsuits, Capitol Hill lobbying, and even challenges of the measure’s constitutionality.

“From the IFA’s standpoint, nothing is off the table at this point,” said Cresanti.

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