National Labor Relations Board Attacks The Franchise Model


One of my most important roles as General Counsel of your National Coalition is to monitor legal developments that could have an impact on your franchised businesses. One of the most important and widely reported such developments are proceedings brought by the National Labor Relations Board (NLRB) against McDonald’s and several of its franchisees.

The NLRB was formed in 1935 as an independent federal agency with the mission of safeguarding employee rights to organize and to prevent unfair labor practices by both employers and unions.

These matters grow out of unfair labor practice charges approved by the General Counsel to the NLRB, originally filed by a variety of labor unions and affiliated organizing committees. The impetus is the highly publicized campaign to mandate substantial increases in the minimum wage. The NLRB alleges that in its efforts to combat and undermine labor organizing activities, McDonald’s in combination with its franchisees, committed unfair labor practices.

What is most concerning is that the NLRB’s theory is that McDonald’s as the franchisor is a joint employer with the franchisee of the franchisee’s employees. This theory has been endorsed by Richard Griffin, the General Counsel to the NLRB. The NLRB has stated in part that, because McDonald’s engages in control over its franchisees beyond what is necessary to protect its brand, that makes it jointly responsible for the violations of the National Labor Relations Act.

Among the allegations against McDonald’s and its franchisees is that in a concerted fashion, they subjected employees to a variety of illegal actions in response to organizing efforts, including reductions in hours, discriminatory discipline, threats surveillance, interrogations, and overbroad restrictions on communicating with union representatives. McDonald’s and its franchisees deny all of these allegations.

If McDonald’s is found to be the joint employer of its franchisees’ employees, that would make it liable for all matters and claims in any way related to the employment relationship. This would include labor and employment law violations, payroll withholding taxes, workers’ compensation insurance, family/medical/maternity/sick leave, unemployment insurance, health insurance obligations under the Affordable Care Act, employment discrimination, sexual harassment, termination claims, among many others. This would substantially increase the liability of franchisors arising out of the relationship between their franchisees and the employees of those franchisees.

Needless to say, labor unions—whose membership has been steadily declining—have a major stake in the outcome of this dispute. It has been estimated that if SEIU could unionize just half of McDonald’s domestic franchisees, it would earn more than $155 million in initiation fees and dues in just the first 12 months. More broadly, franchise businesses in the United States employ more than 8.7 million workers; this reservoir of nonunion employees is seen as an enormous untapped resource by SEIU and other labor unions.

At present, 310 charges are pending against McDonald’s and various of its franchisees. The first of these administrative law hearings have already taken place and they are expected to continue throughout 2015. If the NLRB prevails, McDonald’s and its franchisees have a number of appeals available to them, including to the full board of the NLRB, to the United States Court of Appeals, and ultimately to the Supreme Court of United States.

The NLRB has taken the position that franchisors such as McDonald’s want it both ways. They create, monitor and enforce standards central to their business strategies, including those that affect the relationship between franchisees and their employees. On the other hand, they claim to have no responsibility for the legal and social consequences of those policies in the workplace. Thus, from the NLRB’s point of view, the only way to effectively enforce wage and hour laws is to make the franchisor liable. Of course, this theory could be applied to any franchise system in the United States.

Many believe that the NLRB’s position is not consistent with traditional definitions of a joint employer. However, SEI exercises much more control over its franchisees than the typical franchisor, including McDonald’s. While the SEI franchise agreement recites that the franchisee is an independent contractor, that the franchisee’s employees are not SEI’s employees and that the franchisee exercises complete control over all Labor Relations in the conduct of its employees, the reality is far more complex. Under the franchise agreement, SEI mandates the training that all employees of the franchisee must complete. In particular, all employees must be certified to work in a food service facility. The franchise agreement also requires all of the franchisee’s employees to sign confidentiality agreements at the request of SEI, and to turn over all new developments of SEI without compensation. The operations manual contains 54 pages on employee policies and procedures. Finally, and perhaps most significantly, SEI is responsible for paying the payroll of every employee of every franchisee.

On top of all that, the Obama administration has proposed a substantial increase in the budget for wage and hour enforcement.

Many franchisors have stated that the potential liability growing out of the NLRB matters has created a dilemma for them. They have essentially two choices.

First, they can step on the brakes. This would mean reducing control over franchisees, particularly in the area of employee training, scheduling and supervision; introducing more collaboration and cooperation in the relationship and actually treating franchisees more like independent contractors rather than store managers. They might also reduce the likelihood of wage and hour disputes with employees of franchisees by giving franchisees labor and employment advice.

Second, and in the alternative, franchisors could step on the gas. They could decide that if they are eventually going to be liable jointly with their franchisees for all labor related matters, they should exercise more control over the franchisee and in particular increase oversight of employment matters.

I will continue to keep you informed of these developments as they unfold over the balance of 2015, and likely well into 2016. In the interim, as SEI proceeds with what it promisingly describes as the re-setting of this relationship, we hope that it will bear in mind that creating a truly collaborative relationship with the National Coalition may not only reduce its exposure to employee claims such as those asserted against McDonald’s, but much more importantly, it also just makes plain good sense. It is so clearly and obviously in the best interests of SEI and all stakeholders in the system to do so.