The National Labor Relations Board (NLRB) caused an earthquake in the field of franchising with the General Counsel’s announcement July 29, 2014, of complaints against McDonald’s USA, LLC. The NLRB General Counsel (GC) authorized the issuance of complaints of alleged labor law violations against the franchisor as the joint employer with its franchisees. Those who brought the complaints were employees of franchisees.
The prospect of being jointly liable with a franchisee for a franchisee’s labor law violations is shocking to franchisors. The NLRB GC’s approach is a radical change from more than 30 years of settled law that respects the distinct roles of the franchisor and franchisee. If followed by the NLRB and the courts, this change would threaten the franchise model. Joint employer status would weaken one of the fundamental benefits of franchising for the franchisor, namely the allocation of employment responsibilities and risks to the franchisee.
Franchisors should not be viewed as joint employers of their franchisee’s employees. Franchisors do not determine the terms and conditions of employment of the franchisee’s employees. They do not hire or fire the franchisee’s employees, set work schedules, set wages, or pay the employees.
A different but equally jarring event occurred in 2010, when a federal district judge held that Coverall, the commercial cleaning franchisor, was actually the employer of its franchisees under Massachusetts wage laws (Awuah v. Coverall N. Am., Inc., 707 F.Supp.2d 80 (D. Mass. 2010)). The Court held that the franchisees were not independent contractors but rather employees of the franchisor. The judge stated, shockingly, that franchising as a business model “sounds vaguely like a description for a modified Ponzi scheme….” Although Massachusetts has one of the most stringent employment classification tests of all states, this misunderstanding and even contempt of the franchise model coming from a federal judge is unfortunate.
On the other hand, the California Supreme Court upheld a traditional employer analysis in a case against Domino’s Pizza, LLC, holding on August 28, 2014, that the franchisor was not vicariously liable for sexual harassment by an employee of a franchisee (Patterson v. Domino’s Pizza, LLC (S204543, 2014)). This is the type of result that affirms the value of the franchise model.
McDonald’s will contest the NLRB cases. Coverall has appealed the district court decision to the First Circuit. We will follow developments in these and other employment and labor law cases that impact franchising and report on them here.