One huge perk to franchising is that it enables many Americans to own and operate their own small business which would not be possible without franchisors. That perk is now in peril as the franchise model many small businesses rely upon is under attack by the Service Employers International Union (“SEIU”). SEIU disfavors the prototype franchising model because of the division of work between franchisees and franchisors. Small business owners pay for the right to use a corporate brand, and the franchisor researches marketable products and services and promotes the brand. The local franchisee agrees to produce the products or render the services at a certain price with quality specifications and handles all of the local employment matters. SEIU finds it much easier to organize labor unions in big businesses rather than in small ones. As such, SEIU has made it a mission to undermine the traditional franchise model in an attempt to create larger – “more union-friendly” work forces.
On July 29, 2014, SEIU won a victory in front of the Chief Prosecutorial Officer1 (“CPO”) of the National Labor Relations Board (“NLRB”) which could create a ripple effect across all franchises in America. The CPO held that the fast-food giant, McDonald’s, is a “joint employer” along with McDonald’s franchisees. As such, McDonald’s, as a franchisor, can be liable in lawsuits filed by a franchisee’s workers. The claims at issue involved the Fair Labor and Standard Act (“FLSA”), wherein franchisee’s employees asserted that they were forced to work off the clock and were not paid overtime. McDonald’s is obviously appealing and maintains that the decision goes against years of established law regarding the United States franchise model. Heath Smedstad, a McDonald’s Senior Vice President of Human Resources, stated: “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.”
The President of the International Franchise Association (“IFA”) also blasted the McDonald’s decision stating that it was “radical and unprecedented.” He asserted that if franchises are considered joint employers, it will “be a devastating blow to franchise businesses and the franchise model.”
Many experts surmise that if this decision stands, it could pave the way for the fast food industry to unionize. In fact, that is the long-standing plan of SEIU. In These Times, an independent, albeit left-leaning, magazine interviewed several SEIU activists last year. The following SEIU strategy was revealed: “SEIU also has a comprehensive national plan in the works … the first step is to challenge the legal distinction between a corporation and its individual franchises … SEIU aims to hold corporations liable for their franchisees’ actions ….” If SEIU succeeds, the franchise business we know and love today will be permanently altered.
As it currently stands, based on the CPO’s decision, McDonald’s is liable for wrongful employment actions taken by its franchisees. The decision basically states franchisors need to control franchisees’ actions. How does a franchisor do this? Unfortunately, the simple answer is to replace local franchises with corporate-owned stores. This defeats the purpose of franchising and eliminates opportunities for many Americans to operate a small business with an established system.
Both franchisors and franchisees need to keep their eyes on the Golden Arches. If McDonald’s is unsuccessful appealing this ruling, substantial changes on how franchises deal with franchisee workers, especially in the fast-food industry, are expected. If the decision is upheld, corporate McDonald’s could be responsible for approximately 750,000 more employees in its United States restaurants. Echoing Mr. Smedstad’s concern, “millions of jobs and the livelihoods of hundreds of thousands of independent franchise small businesses are now at risk” due to the McDonald’s decision.