Outside Insights | November 2014 | By Guest Author

An Undesirable Consequence

Some say misguided pro-labor push could threaten the franchise model.
image used with permission.

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An effort by Richard Griffin, the General Counsel (GC) of the National Labor Relations Board (NLRB), to raise wages and otherwise benefit franchise employees may have an unexpected and undesirable consequence: a threat to franchising as a business model. Although Griffin’s desire to benefit employees is laudable, he has chosen the wrong way of going about it.

For the last two years, the Service Employees International Union (SEIU) has been staging demonstrations in which fast food workers called for higher wages and greater rights to organize. According to SEIU, in response to employee walkouts, certain McDonald’s franchisees allegedly terminated employees and took other measures to prevent unionization. As a result, the SEIU filed 181 complaints of unlawful labor practices against McDonald’s franchisees with the NLRB. The franchisees have denied engaging in impermissible activity.

Griffin is proceeding against the franchisor, McDonald’s USA LLC, as a joint employer in 43 of these cases. His decision to do so was announced July 29.

Not surprisingly, McDonald’s will contest these cases. After all, under the longstanding and highly successful U.S. franchise model, the role of the franchisor is to exercise only limited control over the franchisee—namely, enough to maintain trademark rights and preserve the value of the franchise, thereby benefitting all parties involved. Traditionally, companies such as McDonald’s have never been expected to control their franchisees’ employees by, say, determining the terms and conditions of employment, hiring and firing people, cutting checks, or setting work schedules and wages.

“The franchisor and franchisee are separate companies with separate interests.”

For more than 30 years, the NLRB has respected the distinct roles of the franchisor and franchisee. A company can be deemed a joint employer under the National Labor Relations Act (NLRA) only when it shares the ability to directly and immediately control or co-determine essential terms and conditions of employment, including hiring, firing, discipline, supervision and direction. However, in another pending case, the GC’s office has proposed a new standard under which a company may be deemed a joint employer if it “wields sufficient influence over the working conditions of the other entity’s employees such that meaningful collective bargaining could not occur in its absence.” If this becomes law, it will render some franchisors liable for their franchisees’ NLRA violations. This would not help the franchisor or the franchisee. And it may not help employees.

The McDonald’s complaints will not change the law any time soon. An NLRB Administrative Law Judge, whose decision will be submitted to the full five-member board, will try the complaints. Subsequently, the NLRB’s decision may be either appealed in a Federal Court of Appeals or enforced.

Although this case will take some time to reach a final decision, it may be enormously consequential to franchising as a business model.

For starters, it would encourage unions to bring similar charges against other quick-serve franchises and against franchise companies in other sectors. This would force some franchisors to incur significant legal costs to defend against the alleged wrongdoing of franchisees. Franchising may decline in popularity as prospective franchisors decide not to assume the legal risk. Some franchisors may decide to control their franchisees far more actively in order to protect against liability. Others may decide to play a less active role so that they can argue that they are not joint employers.

Such a change is not likely to make collective bargaining any easier. The franchisor and franchisee are separate companies with separate interests. Moreover, joint employers cannot be forced to engage in multiemployer bargaining with unions without their consent.

But joint employer status could weaken one of the fundamental benefits of franchising for the franchisor—namely the allocation of employment responsibilities to the franchisee.

Even if the legal standard changes, the question of joint employer liability will remain a factual determination made case by case. Here are some things franchisors can do now in anticipation of a possible change in the law:

  • State in the franchise agreement that the franchisee is solely responsible for control and management of its employees.
  • Don’t make specific recommendations regarding hiring, firing, promotions or demotions of franchisee employees (i.e., never evaluate franchisee employees).
  • Don’t control pay rates of franchisee employees.
  • Don’t control employment conditions (e.g., scheduling and breaks).
  • Don’t supervise franchisee employees.
  • Don’t run payroll and benefits for or maintain employment records of franchisee employees.
  • Require franchisee managers to take outsourced training on their legal obligations as employers. Compliance training will reduce the occurrence of violations.

These steps are worth taking even if the law does not change.

Thomas M. Pitegoff, veteran franchise attorney, is based in the New York office of national law firm LeClairRyan. Michael G. Caldwell is senior counsel in LeClairRyan’s New Haven, Connecticut, office, where his focus includes labor and employment litigation.

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