Let the Franchisor Beware: The NLRB Finds That McDonald’s Is Liable for the Conduct of Its Franchisees

Many of the market leaders in the industries that pay the lowest wages (think of fast-food restaurants and convenience stores) use a common device to limit their liability for unlawful conduct:  the franchise.  These companies (franchisors) grant franchises to other entities (franchisees) to operate locations in their name.  Often the franchisees have limited assets. As a result, employees who challenge illegal labor practices at the franchises are unable to collect any money even when they prevail on their claims.

Some of these market leaders also use the franchise device to deny responsibility for the conduct of their franchise operators.  For example, in response to the growing movement to require fast food restaurants to pay their workers a living wage, many of the market leaders have dubiously claimed that they have no control over the wages that their franchisees pay.  They are thus seeking to use the franchise as an excuse for washing their hands of culpability for a situation in which women and men who work full time remain mired in poverty.

Fortunately, some, courts and other legal entities have begun to take a more critical view of the franchise.  The California Supreme Court, for example, has granted review in the case of Patterson v. Domino’s Pizza.  In Patterson, the court of appeal held that a Domino’s franchisor could be liable for a franchisee’s alleged violations of the Fair Employment and Housing Act. Should that be affirmed, the plaintiff (as well as other potential plaintiffs in California) will presumably have access to a deeper pocket in the event that he is successful in his claims.

A different California court reached the opposite result in Aleksick v. 7-Eleven.  In that case, the court of appeal held that 7-Eleven was not liable for the actions of its franchisees in a case alleging failure to pay wages due.  Aleksick. 

The National Labor Relations Board has also recently addressed this issue. On July 29, 2014, Richard F. Griffin Jr., the General Counsel of the Board, ruled that McDonald’s could be held jointly liable for labor and wage violations by its franchisees.  This ruling was in response to some 180 complaints that were brought against McDonald’s and some of its franchisees for cutting the hours of and in some cases firing employees who were organizing to seek higher wages.

The General Counsel’s ruling was based in part on the allegations that McDonald’s had significant control over its franchisees’ employment practices.  For example, McDonald’s provides its franchises with human resources software. McDonald’s also exercises control over food, cleanliness and employment practices.  In fact, McDonald’s often owns the actual restaurants that its franchisees use.

The General Counsel’s ruling is significant in that it appears to signal a shift in the way that the Board views franchises.  In 1982, in the case of National Labor Relations Board v. Browning-Ferris Industries of Pennsylvania Inc., the Court of Appeals for the Third Circuit held that the proper test for determining joint employer status was whether an entity exercised “significant control” over the employees at issue.  That test has been narrowed in the years since, with the Board holding that a company is a joint employer only when it directly controls the employment practices of a franchisee.

The General Counsel’s ruling is only a first step.  Ultimately, this issue may very well wind up before the full five-member Board, and then in the federal courts.  However, it is an important step for workers who seek to vindicate their rights under the law.

If you work for a fast-food company or a convenience store, or any other branch of a large national chain, and feel like your rights are being violated, please feel free to contact us for a free consultation.  We can be reached at 510.444.4400 or at inquire@hunterpylelaw.com.