The recent directive by the general counsel of the National Labor Relations Board (“NLRB”) treating McDonald’s Corporation as a “joint employer” in conjunction with its franchisees has sent shockwaves through the franchise industry.

The NLRB’s General Counsel, Richard Griffin, authorized 43 unfair labor practice complaints be issued against McDonald’s, saying the cases could move forward treating McDonald’s USA LLC as a joint employer along with its franchisees.  Griffin’s directive followed 181 unfair labor practice charges the NLRB has received since November 2012, which challenge practices related to responses from McDonald’s and its franchisees to worker protests. In addition to the 43 ULP’s that will now move forward, the General Counsel’s office dismissed 68 of the charges and is still investigating 64 of them.  Assuming they do not end in settlements, an administrative law judge will likely have to consider the General Counsel’s position as the proceedings move forward.  While an ALJ’s decision does not carry the same implications of a full-board decision, the determination could still have a major impact on most if not all companies that utilize a franchise model to run their businesses.  It would then likely be followed by an appeal to the full-board and then to the Court of Appeals.

The ruling could increase liability in the restaurant and other franchise-heavy industries and give unions a significant boost in their organizing efforts.  While McDonald’s may be one of the more controlling franchisors, setting standards for its franchisee restaurants on appearance, food quality and business management, among other things, the General Counsel’s analysis would probably apply to other franchise businesses as most require their franchisees to meet certain standards.

Additionally, while the directive relates specifically to allegations of unfair labor practices, it may also have implications for union organizing efforts, something workers’ groups have been after for some time.  The NLRB, if it adopts the general counsel’s stance, could also consider franchise owners and their franchisees joint employers for the purposes of union elections and collective bargaining.

If the Board were to take the step of considering McDonald’s to be a joint employer for union election and bargaining purposes, it would likely be a boon for unions and give them more options for organizing.  Instead of looking to represent a small group of workers at restaurants owned by a single franchisee, for example, a union could conceivably seek to represent a unit composed of a larger group of McDonald’s employees from restaurants operated by multiple franchisees, or even nationwide.

While the general counsel’s joint employer determination has direct implications for issues presented at the NLRB — such as complaints of unfair labor practices or petitions for union representation elections — a full board ruling may eventually open the door for companies like McDonald’s, which run on a franchise model, to be viewed as joint employers in the context of other employment disputes, such as cases alleging wage and hour disputes and/or Title VII complaints.

In a recent interview with the Dallas Business Journal, Munsch Hardt Kopf & Harr, P.C.’s own Mary Nix weighed in on the ruling as well.  “The franchisors are wondering whether they can do anything to protect themselves,” says Nix.  She also notes “The franchisors are concerned about a chilling effect on their sales of franchises.”  There’s really not much franchisors can do for now except pay attention to this issue as the NLRB pursues it, Nix said. Most franchise agreements already contain language that says the franchisor isn’t liable for labor conditions created by the franchisee, she said.  “The vicarious liability issue is ever-present in the franchise community,” she said. “This brings it to the forefront. Those questions about how much control a franchisor is taking in the operations of its franchisees is going to be a big question in courts and with governmental agencies going forward.”

In Texas, it has historically been difficult to hold a franchisor liable for the acts of its franchisees in employment scenarios, but that is changing, Nix said.  If McDonald’s loses, it could be forced to reinstate fired workers, hire employees it failed to hire and pay back pay, among other penalties, Nix said. The employer could also be ordered to rescind any illegal policies, renounce past violations, remove improper disciplinary actions from employee files and promise not to commit violations in the future.  “This would all go into a notice that must be posted for 60 days, essentially stating, ‘Here is what we did wrong, here is how we will fix it, we will not do that again and here are your rights under the NLRA,’ Nix said.  If you would like to read the full article in the Dallas Business Journal, please click here.

Overall, this issue is a significant one that franchisors and franchisees need to keep a close eye on.  The Labor & Employment and Franchise Law Practice Groups at Munsch Hardt Kopf & Harr, P.C. have extensive experience helping clients navigate difficult issues and we are here to help.