New NLRB complaints could impact all franchises

On Dec. 19, the National Labor Relations Board (NLRB)

issued complaints against McDonald’s franchisees and their franchisor, McDonald’s USA, LLC, as joint employers.  The complaints allege that McDonald’s USA, LLC and certain franchisees violated the rights of employees working at McDonald’s restaurants at various locations around the country by, among other things, making statements and taking actions against them for engaging in activities aimed at improving their wages and working conditions, including participating in nationwide fast food worker protests about their terms and conditions of employment during the past two years.

Considering a franchisor to be a joint employer with a franchisee represents a major change in practice; over the summer, the NLRB’s general counsel had said this could happen. McDonald’s responded to the charges:

The National Labor Relations Board’s actions today improperly and dramatically strike at the heart of the franchise system – a system that creates economic opportunity, jobs and income for thousands of business owners and their employees across the country.

McDonald’s is disappointed with the Board’s decision to overreach and move forward with these charges, and will contest the joint employer allegation as well as the unfair labor practice (ULP) charges in the proper forums. . . .

McDonald’s serves its 2,500 independent franchisees’ interests by protecting and promoting the McDonald’s brand and by providing access to resources related to food quality, customer service, and restaurant management, among other things. These optional resources help entrepreneurs operate successful businesses. This relationship does not establish a joint employer relationship under the law – and decades of case law support that principle.

Further, as the Wall Street Journal editorializes,

Under this suggested new standard, franchise companies in a swath of industries including hotels, retail and gymnasiums would be on the hook for workers at its franchisees. This could gut the franchise model. Companies that contract out services like cleaning or security could be held liable for and required to collectively bargain with workers employed by its subcontractors. Every business in America that utilizes a vendor or subcontractor would have to rewrite its contracts.

Diana Furchtgott-Roth has a good article on the joint employer change and its implications. She writes,

So the NLRB unilaterally changes the law without any notice or public comment, uses the change in the law to sue a major corporation, and tells the general public that the legal reasoning behind the change cannot be revealed. That’s Kafkaesque. . . .

The NLRB’s decision is indeed cataclysmic for America’s system of franchise business.  If the parent company is considered a joint employer, and sets terms of hiring, then the value of a franchise business is reduced. People with complaints can sue McDonald’s USA, not just their local franchise. A single employer franchise may not be worth suing.  But if the franchisor is a joint employer, such as McDonald’s USA, with a value of $100 billion, then every local franchise is worth suing. . . .

The franchise model is popular because it is the easiest way to launch a small business. Franchise businesses employ over 8 million workers. Entrepreneurs are less likely to want to buy a franchise if they are required to have unionized labor and if they do not have control over all the working conditions. And no company is going to want to sell franchises if they are going to be liable. One reason that companies sell franchises is to reduce liability.

Furchtgott-Roth also notes that “The NLRB is changing the definition of an employer to make it easier for unions to organize fast food workplaces.” A New York Times editorial gets right to that point:

Memo to McDonald’s: Wouldn’t it be easier just to bargain over the terms and conditions of employment?