In an attempt to gain leverage in settlement negotiations, the NLRB Office of the General Counsel issued a directive that has rocked the franchise world.  Days ago, the NLRB Office of the General Counsel determined that McDonald’s USA, LLC, the franchisor, could potentially be held liable for the employment actions of its franchisees under a “joint employer” theory. The General Counsel’s decision has authorized numerous unfair labor practice complaints based on alleged violations of the National Labor Relations Act (NLRA) to proceed against both the franchisor and franchisee entities.  While this shift by the NLRB is in its early stages, it is startlingly significant and tees up years of legal battles over the issue.

This decision follows an earlier amicus brief filed approximately one month ago on behalf of the NLRB General Counsel in Browning-Ferris Industries of California, Inc. The amicus brief argued that the Board “should abandon its existing joint employer standard.” The existing standard only finds joint employer liability when an employer exercises direct or indirect control over significant terms and conditions of employment of another entity’s employees.  The amicus brief advocated for a new, more liberal standard “that takes account of the totality of the circumstances, including how the putative joint employers structured their commercial dealings with each other.”

The NLRB’s proclamation sent shockwaves through the franchise world.  If the NLRB General Counsel follows through on its threats and Court’s later ignore precedent and adopt this radical viewpoint, the essence of the franchise business model would be significantly affected.  Typically, franchisors do not exert the level of control over the franchisees’ terms and conditions of employment to be deemed a joint employer.  This has stuck the appropriate balance between franchisor and franchisee liability.  Under the existing standard, those franchisors that do exhibit control open themselves up to being held joint employers.  Those that don’t, don’t.  The proposed “totality of the circumstances” standard blurs the line that franchisors rely on in setting up their business model and managing their liability.

The new standard becomes a catch-22 for franchisors.  Franchisors would have to consider whether they need to exercise more control over the terms and conditions of the franchisees’ employees’ employment. Franchisors may then feel compelled to weigh in on wages, payroll organization, hiring decisions, terminations, and disciplinary issues typically solely left to franchisees.  When they do so, they will fall into the NLRB’s General Counsel’s trap and perpetuate the argument that they are joint employers.

We will have to wait and see whether the NLRB begins actively pursuing “joint employer” cases against other Franchisors or parent companies that would otherwise not have been included in the earlier definition of “employer” under the NLRA.  However, this change in course by the NLRB may also send a signal that other departments within the administration, i.e. the Department of Labor, Equal Employment Opportunity Commission.

The NLRB is still in its investigation phase with McDonald’s franchisees. McDonald’s has responded to the NRLB stating, “We believe there is no legal or factual basis for such a finding, and we will vigorously argue our case at the administrative trials and subsequent appeal processes which are likely to follow from the issuance of the complaints.”  If the complaints are issued against McDonald’s as a franchisor, the next step will be for McDonald’s to address any complaints filed against it before an administrative law judge.   Depending on the outcome, the issue could then go to the full Board or the Courts.  Depending on what type of administration we get in the coming years or changes at the NLRB, we may see this issue flip flop between standards for a while.  Certainly this issue is one that could eventually be decided by the U.S. Supreme Court.  McDonald’s deserves our support during this fight.  So super-size your order because this fight is going to cost a lot more than their dollar menu can support.