A determination by the National Labor Relations Board's general counsel that McDonald's Corp. should be considered a “joint employer” with its franchisees could dramatically increase franchisors' potential liabilities should it become law.
While many experts doubt that will happen, it has generated considerable concern among franchisors and franchisees and may take years to resolve.
There are steps, though, that franchisors can take to minimize any possible risks, experts say.
In a late July memorandum, the office of NLRB General Counsel Richard F. Griffin Jr. said 43 cases filed by employees since November 2012 against franchisees of McDonald's subsidiary McDonald's USA L.L.C. in Warrenville, Illinois, have been found to have merit.
McDonald's USA will be named as a joint employer respondent, if the parties are unable to reach a settlement in the cases.
There is a “very real possibility that franchising as we know it comes to an end,” if the general counsel's determination prevails, Don Fox, CEO of Jacksonville, Florida-based Firehouse of America L.L.C., said.
Firehouse of America has 775 franchised restaurants in 42 states and Puerto Rice, in addition to its 31 company-owned stores in Florida.
“It's a catastrophic event from a legal perspective,” said Robert Cresanti, executive vice president of government relations at the Washington-based International Franchise Association, which represents franchisees. “It shatters fundamental principles of privity and control, and I think we're going to have long-term repercussions from it,” including companies being reluctant to set up franchise operations.
The determination “goes against decades of established law regarding the franchise model in the United States,” on which franchisors rely to successfully run their businesses, Heather Smedstad, McDonald's USA's senior vice president of human resources, said in a statement.
“McDonald's does not direct or co-determine the hiring, termination, wages, hours, or any other essential terms and conditions of employment of our franchisees' employees — which are the well-established criteria governing the definition of a "joint employer,'” she said in the statement.
“We don't hire, we don't fire, we don't discipline, we don't tell an employee of a franchisee what to do,” said Mr. Fox of the Firehouse of America franchise operations.
“Potentially, it has huge implications,” said Jonathan T. Hyman, a partner at Meyers, Roman, Friedberg & Lewis in Cleveland. While franchisors now can insulate themselves from liability issues ranging from a patron choking on a McNugget to an employee alleging discrimination, the NLRB stand would hold franchisors jointly and severally liable for the franchisee's conduct, over which a franchisor has no control.
“It's an extraordinarily dangerous precedent,” said Mr. Hyman, who said the issue has become part of the broader living wage movement directed at improving the salaries of fast food workers.
If ultimately upheld, “franchisors are going to have to figure out a way to manage these new liability risks,” said Christopher G. Ward, a partner at law firm Foley & Lardner L.L.P. in Chicago.
“To the extent that franchise companies have the ability to insure against these types of claims ... it would get very expensive very quickly to the point where it might be cost-prohibitive,” said Adam J. Siegelheim, a shareholder at Stark & Stark P.C. in Lawrenceville, New Jersey.
There may also be a tension between the general counsel's position and trademark law. Brand names are protected under the Lanham Act, which addresses what franchisors must do to license brands, and requires the brand owner to impose quality controls, said Rochelle Spandorf, a partner at Davis Wright Tremaine L.L.P. in Los Angeles. It is these controls, for example, that would prevent McDonald's franchisees from serving Chinese food.
“The NLRB's position is that if you have all these brand controls, they must influence employment controls,” she said. “I don't see the NLRB general counsel taking the Lanham Act into consideration.”
For franchisors to protect themselves, “the first thing I would do is look at my franchise agreement” to see if there are better ways to describe the franchisor-franchisee relationship, Mr. Ward said.
“Don't provide your franchises with a template employee manual they can customize,” even if it is helpful, because a plaintiff attorney could argue it reflects control over essential employment decisions, Ms. Spandorf said.
An NLRB spokesman could not be reached for comment.