On July 29, 2014, the National Labor Relations Board (“NLRB” or “Board”) authorized 43 complaints against McDonald’s franchisees for alleged violations of the National Labor Relations Act. The Board also named the franchisor, McDonald’s USA, LLC, as a joint employer respondent in the cases, making the national franchisor potentially liable for the acts of its franchisees. Two months prior, on May 12, 2014, the NLRB invited parties to file amicus briefs addressing the “Board’s joint employer standard, as raised in its pending case, Browning-Ferris Industries (Case 32-RC-109684).”
The NLRB announcements are significant because they foreshadow a potential change to the NLRB’s current legal standard for the franchise industry, namely, that as long as the franchisee is an independent contractor who maintains full control over the internal daily management of the franchised business, the franchisor is not a joint employer and not liable for any unlawful employment practices committed by its franchisee.
Franchises are common in the hospitality and restaurant industries, and there exists a delicate balance of powers between the franchisor and franchisee. The franchisor seeks to protect its brand and its intellectual property by establishing standards so that each customer receives the same level of service and products at each franchise location. Franchisees benefit from the goodwill associated with the brand, and by receiving training, software and support from the franchisor. Under most franchise agreements, the franchisee remains an independent contractor with full control over the day-to-day management of its business including its employment practices.
Since 1984, the NLRB legal analysis for determining joint employer liability focused on a showing of “significant control” by the alleged joint employer over matters relating to the employment relationship such as hiring, firing, discipline, supervision, and direction. See Laerco Transportation, 269 NLRB 324 (1984). This analysis resulted in few franchisors being deemed joint employers. In its June 26, 2014 amicus brief for the Brown-Ferris Industries case currently pending before the Board, the General Counsel of the NLRB urged the Board to “return to the Board’s traditional approach prior to Laerco Transportation and TLI, Inc.,” and the adoption of a standard “that takes account of the totality of the circumstances, including how the putative joint employers structured their commercial dealings with each other.” This standard, according to the brief, “would make no distinction between direct, indirect, and potential control over working conditions,” and would find unexercised “potential control . . . sufficient to find joint-employer status.” The Board’s July announcement regarding the McDonald’s complaints may be a hint that it intends to adopt the broad joint employer test advocated by its General Counsel.
If this new standard is adopted, franchisors will have to take greater precautions to ensure that the oversight over their brand, dictated in the Franchise Agreement, does not expose them to increased liability for the adverse employment actions of their franchisees. To that end, franchisees need to carefully avoid any requirement that implicates any direct employment practice, such as recruitment, hiring, firing, payroll issues, reviewing employment records or tracking employee wages and performance.
The Board has yet to rule in the Browning-Ferris Industries case but franchisors need to carefully examine their franchise agreements and guard against any hint of franchise control that would expose it to greater liability via the NLRB’s potential heighten standards for joint employment.
Doyle, Barlow & Mazard has experience drafting and reviewing complex contracts, including franchise agreements, on behalf of restaurant clients. For more information, contact
 www.nlrb.gov/news-outreach/news-story/nlrb-office-general-counsel-authorizes-complaints-against-mcdonalds; See also http://www.nlrb.gov/case/32-RC-109684