This week the general counsel of the National Labor Relations Board (NLRB), Richard Griffin, authorized 43 complaints of unfair labor practices brought by McDonald’s franchise workers to proceed against the franchisor, McDonald’s USA LLC. Allowing the workers’ cases to proceed against McDonald’s is not only unprecedented, but could have far-reaching implications on the entire franchise industry, including other restaurants, hotels, car and auto services, and financial services, among other businesses. By increasing corporate franchisors’ potential liability, the NLRB’s directive, if upheld, could overturn decades of established franchise law and jeopardize the viability of the franchise business model.
The NLRB directive is based on the theory that the Fair Labor Standards Act (FLSA), which extends liability to employers, encompasses in the definition of employer any individual that possesses sufficient control over the workers in question based on the economic realities of the relationship. See Zheng v. Liberty Apparel Co. Inc., 355 F.3d 61, 66 (2d Cir. 2003). Although courts have analyzed the employer-employee relationship between the franchisor and a franchisee’s employees, no court has extended FLSA liability to a franchisor for the acts of its franchisee. Instead, courts generally recognize that while the franchisor imparts minimum standards on the franchisee to ensure high quality and consistency across its brand, the franchisee independently owns and operates the franchise and, thus, is responsible for managing its day-to-day activities, including hiring and firing employees, setting wages, and establishing work schedules.
If upheld, the NLRB’s directive will likely embolden many AGs, particularly those who have been active in workplace issues in their role as counsel to their state labor agency, to pursue larger franchisors for the actions and decisions of their franchisees. Recently, AGs have actively investigated the labor violations of franchisees and other employers of low-wage workers. For example, Massachusetts AG Martha Coakley fined a Massachusetts Burger King franchisee $50,000 for violations of child labor laws, New York AG Eric Schneiderman recovered $500,000 from seven McDonald’s franchisees and $450,000 from six Domino’s franchisees for wage and hour violations, and Illinois AG Lisa Madigan recovered $100,000 from a contractorfor underpaying employees on a public works project. AG Schneiderman and Washington AG Bob Ferguson have also been active in supporting the rights of low-wage workers.
In light of these recent actions, businesses should expect AGs to continue to seek new ways to pursue legal action against corporate franchisors for alleged labor violations of their franchisees.