Industry News | August 5, 2014 | QSR Exclusive Brief

Joint-Employer Ruling for McDonald's Could Change Franchise Business

Read More About

The franchise business model could be in for a shake up if last week's joint-labor ruling regarding McDonald's holds up through the appeal process. Last Tuesday, the general counsel of the National Labor Regulations Board (NLRB) found the fast-food giant potentially liable for labor violations brought against its franchisees. Industry experts say it's a dangerous precedent for the quick-serve industry—and one that goes against at least 30 years of established case law.

"For the last 30 years, if not longer, when you had complaints of unfair labor practices, and also wages or anything like that, you would file a complaint and maybe try to bring corporate into that," says Angelo Amador, vice president of labor and workforce policy for the National Restaurant Association (NRA). "But the standard has always been that if the other employer does not have decision-making authority over the hiring, the firing, the compensation, the hours, and all of those things, then that other employer is not liable."

As a joint employer, McDonald's could be liable for the 181 claims against its franchisees currently under review by the NLRB. Amador says the ruling goes against the historic definition of a joint employer. Under the analysis of the general counsel, control over aspects of the franchised business included factors such as uniforms regulations, the menu, the price, and the location, he says. "They’re looking at a lot of things that are unrelated to employment. It’s a big stretch in our opinion and is not current law."

In a statement released last week after the decision, McDonald's asserted it would appeal. If the ruling stands, it could pave the way for unionization in the quick-service industry, experts say.

"There are two ways workers can benefit from this decision," says Catherine Ruckelshaus, general counsel and program director for the National Employment Law Project (NELP). "Often times franchisees are small and under capitalized ... so they might not be able to fix all the problems. It's good to have more than one entity responsible."

The second benefit is that employers like McDonald's are more likely to employ more oversight at franchised units to reduce complaints, she says. Ruckelshaus adds that the factors of the decision were not unprecedented, and the NLRB "looks for whether or not the entity shares or codetermines the working conditions, and a lot of things can factor into that."

NRA's Amador says the ruling could limit the freedom franchisees have if McDonald's does employ more oversight. "If we’re going to have a change of this magnitude, it should be done through the regulatory process," he says. "Then employers can adapt as well instead of acting retroactively."

By Tamara Omazic


If the decision stands it could change the face of food franchising in the QSR area. If I were a franchisor, in this kind of situation , I'd want to move away from small operators (1-3 stores) and move to a population of franchisees that have real scale (15 to 50 stores).An inexperienced, under capitalized small operator is more likely to make mistakes and not have the money to pay the cost of fixing the problem (or paying the fine). In addition, small operators are hard to control...they have no one outside the store and don't always understand why the 'controls' are necessary.Large, experienced operators will have fewer problems that create government regulatory risk and those that do make mistakes will have the staff and financial resources to fix them. Finally, bigger franchisees will have deep enough pockets that there will be little risk of reaching into the franchisor pockets. Franchisors may pay the penalty but they will get the money back from the involved long as the franchisees have the money and a big enough stake in their business to stay.Insurance might be seen as an alternative but it won't work longer term. Insurance, in the long term, will recover the costs caused by regulatory penalties (plus profits for the insurance companies). So every franchisee will pay rather than just the 'bad' franchisees. This raises every ones cost and won't effectively motivate the bad actors (see workmans comp). Finally an insurance program will create compliance programs that will burden all operations but especially the smaller ones. This will make it more difficult for small companies to make a profit and with less resources for marketing and customer service. So even insurance will push towards larger franchisees.And the growth of larger franchisees will accelerate if this ruling serves as a first step to making franchisors more and more financially responsible for franchisee actions.

The NLRB's traditional role has been to be the arbiter in labor disputes, but in the Obama administration all departments have become activist anti-business tools. The complaints under discussion have nothing to do with business/labor relations, so the NLRB is over-reaching and this possible decision is illegal and will be overturned in court. None of this is necessary but it is disruptive, which seems to be the mantra of the current administration.

Add new comment