On behalf of Alexis McKenna of Winer, McKenna, Burritt & Tillis LLP on Monday, August 25, 2014.
For decades now, corporate franchisors have been able to have the best of both worlds with the franchise business model – exerting increasing control over their franchises' operations in order to increase their own profits, while distancing themselves from the unlawful employment practices of the franchisees.
Take McDonald's Corp. for example. McDonald's exercises a great deal of control over its franchisees and their employees through their franchise contracts. This control includes partly setting wage levels, work rules and scheduling, requiring franchisees to use proprietary labor management software, and providing labor guidance to increase profitability. In fact, modern technology has made it easier over the years for corporations to increase its control and monitoring of the franchises, which in turn has increased profitability for the franchisees and the corporate franchisors. But, increasingly, corporate franchisors wish to reap the benefits of the franchise industry while disavowing any responsibility for labor practices inside the restaurants.
That may be about to change.
Through a brief administrative decision on July 29, the National Labor Relations Board (NLRB)'s General Counsel, Richard Griffin, announced that McDonald's could be treated as a "joint employer" (along with the franchisees) in labor cases. In other words, McDonald's could be legally responsible if its franchisees engage in unlawful employment actions, such as improperly paying workers or terminating them for union organizing. In addition, treating McDonalds and its franchisees as "joint employers" would make it easier for fast food workers to unionize. Instead of the time-consuming and expensive process of unionizing workers at each franchise location, company-wide organization may be feasible. Perhaps more importantly, this decision could set a precedent not only for other franchisors, but for businesses that use temporary workers, subcontractors or so-called independent contractors as part of their business model.
The decision set off a firestorm in the industry, prompting a chicken-little-the-sky-is-falling response from franchisors and their proponents. For example, in a quote in the Wall Street Journal, the chief executive for the International Franchises association said this opinion will "threaten the sanctity of hundreds of thousands of contracts between franchisees and franchisors." An editorial in the Chicago Tribune opined that "the new liability would invite a plague of lawsuits, while forcing corporations to drastically alter their operations." Numerous corporate leaders, such as the CEO of CKE Restaurants, which includes Hardee's and Carl's Jr., claim this change to the system will "destroy" it.
The industry's reaction is totally out of proportion to the potential impact of the decision. Virtually no one wants the franchise system to shut down. Yet, business proponents bombard us with rhetoric that contracts are downright holy and lawsuits are a disease. They lament that forcing corporations to take responsibility for the franchisees will kill the entire system.
We've heard this sort of fear-mongering from the business community before. Take, for example, the 40 hour work week, which union leaders pushed for and business owners fought against in the early 19 th Century. Study after study has since shown that a 40 hour work week has not destroyed our economy, but in fact made businesses more productive and profitable.
It is good to have corporations on the line for all it its franchise workers – it creates incentives for the corporations to keep the franchisees in line and treat their workers better. While corporate leaders fight to protect the status quo, joint responsibility will help ensure that workers in these jobs have their rights protected, and can collectively bargain for fair wages. A study by the National Employment Law Project shows that post-recession job market is weighted heavily toward work in the fast food industry. Over 8 million people work at fast food restaurants, amounting to 15 percent of all private sector jobs in the United States. Given the increase in these kinds of job in the modern economy, we must make sure these jobs can support the economy.
In the end, corporate liability for franchise misconduct will force corporations, who benefit significantly from their franchises, to take responsibility for working conditions that really are under their control. And that is a system that benefits everybody.