It not clear that laws should be made based on cases involving one franchisor, but lately it seems that McDonald’s is at the center of some important legal issues for franchising in the United States.

It not clear that laws should be made based on cases involving one franchisor, but lately it seems that McDonald’s is at the center of some important legal issues for franchising in the United States.

The looming question for franchising since the 2015 National Labor Relations Board (NLRB) decision in the Browning-Ferris Industries case has been the joint employer standard. For the 30 years prior to Browning-Ferris Industries, the NLRB consistently maintained that to find a joint employer relationship, two separate entities must share “direct and immediate” control over the essential terms of employment. In Browning-Ferris, the NLRB decided that a staffing agency and its client—the employer—could be joint employers under a broad standard which not only looked at the exercise of direct control by the staffing agency, but also its indirect control, over the employer and the employees it was providing to the employer. The court also considered reserved control, such as contractual provisions reserving the right to control to the employer, regardless of whether that control had been actually exercised. This new broad approach looking at indirect and reserved control had drastic implications for franchisors because they always exercise some control over their franchisees, and indirect and reserved control are amorphous concepts. Indeed, the International Franchise Association has reported that “the expanded joint employer standard has cost the American economy $33.3B per year, led to 376,000 fewer job opportunities, and resulted in a 93% increase in lawsuits against franchise businesses.”

Enter McDonald’s in a long pending NLRB case (McDonald’s USA v. FastFood Workers Committee and Service Employees International Union) where it was alleged to be a joint employer with its franchisees because McDonald’s exerted at least indirect control over the employees of its franchisees by threatening the franchisee employees who were fighting for minimum wages. McDonald’s offered to settle with the employees without admitting any liability, but the settlement was rejected by the administrative law judge. In late December 2019, the NLRB overruled the administrative law judge, and found that the McDonald’s settlement was acceptable. The NRLB specifically noted that “we conclude that further litigation would impose a substantial burden on the parties without a significant probability of prevailing on the complaint’s joint-employer allegation.”

Appeals will likely follow the McDonald’s decision, but notably since that decision the Department of Labor (DOL) has released its final joint employer rule. Although the DOL test on its face appears more exacting to establish joint employer liability, the final rule published by the DOL on Jan. 16, 2020, and which becomes effective on March 16, 2020, still maintains the “directly or indirectly” language. Nonetheless, the final rule arguably makes some attempt to limit and define the scope of that language. Specifically, the final rule provides that liability will only arise where the potential joint employer “actually exercise[s]—directly or indirectly—one or more of the four control factors (emphasis added).” The rule appears to return to the traditional joint employer “direct and immediate” control standard mandating that in order for one to be deemed a joint employer under the Fair Labor Standards Act (FLSA), a four factor balancing test must be considered which considers whether the potential joint employer: (1) hires or fires the employee; (2) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (3) determines the employee’s rate and method of payment; and (4) maintains the employee’s employment records.

Importantly, the DOL lays out several factors that are not relevant to the joint employer determination under the FLSA, namely, whether the employee is an independent contractor; whether the potential joint employer is a franchisor, licensor or supplier; contractual agreements between the potential joint employer and the actual employer regarding compliance with safety, health or working conditions, quality control standards; and whether the potential joint employer provided an operating manual or employee handbook, or other operational forms and instructions. The DOL has also kept the door open for consideration of other factors “but only if they are indicia of whether the potential joint employer exercises significant control over the terms and conditions of the employee’s work.” See Federal Register, Joint Employer Status Under the Fair Labor Standards Act, Final Rule (Jan. 16, 2020).

So one could say franchising took one step forward with the NLRB decision in McDonald’s and the DOL final rule on the joint employer issue. The DOL final rule appears to offer clarity and a way forward that may minimize lawsuits and allow franchisors to operate without fear of being found to be a joint employer simply because they exercise controls over the franchisee that have nothing to do with the franchisees’ employment practices.

But, this one step forward may be tested very soon with a recent class action case filed in November 2019 against McDonald’s by a group of employees in Chicago who allege that the McDonald’s franchisor and its local Chicago franchisees had failed to protect the franchisee employees from criminal activity taking place in the McDonald’s franchisee and corporate locations. In Acuna v. McDonald’s a group of McDonald’s franchisee employees alleges that the McDonald’s franchisor has not taken sufficient steps to keep them safe from crime and violent attacks in the workplace. Plaintiffs further allege that this is a result of choices that the McDonald’s franchisor made to undermine safety, including the design of the stores, advertising practices at the stores, and the failure to provide adequate safe workplace training. The complaint appears carefully to avoid an explicit joint employer liability allegation, and instead now seeks to pin liability on the McDonald’s franchisor under related theories of negligence and vicarious liability because McDonald’s allegedly knew that the franchisees were operating in high crime areas of Chicago. Consequently, the complaint alleges that the McDonald’s franchisor should be held liable to the employees of the franchisees because it should have foresaw that its franchisees needed different store designs and a whole host of other safety measures in place, and that had the McDonald’s franchisor forced its franchisees to take those measures, it would have prevented or significantly reduced criminal activity at the various franchisee locations.

This author does not know what the McDonald’s franchisor knew or did not know, what it mandated or did not mandate to its franchisees in these Chicago locations, but if the McDonald’s franchisor allowed its franchisees to select the store layout of its choosing, and provided options to its franchisees on how to spend money on additional safety measures, it is hard to see how the McDonald’s franchisor could be held liable for local criminal activity taking place against local franchisee employees. Although the City of Chicago and perhaps the actual local franchisees should be responsible for the safety of these employees, it may be difficult to show that the McDonald’s franchisor could have foreseen the criminal activity alleged to be taking place in the complaint, or been in a position to prevent it.

The possible consequences of this Illinois complaint against the McDonald’s franchisor being successful could be that (1) franchisors will be compelled to take more direct control of their franchisees’ operations and thereby possibly subject themselves to joint employer liability, or (2) franchisors will conduct more due diligence about safety issues for their franchisees, and refuse to open locations in high crime areas. And, although these might be good consequences, we could end up right back where we were with increased uncertainty for franchisors, as well as fewer business opportunities for local franchisees and employment opportunities for local residents. This is all not to say that franchisors and franchisees should not take safety into consideration in their businesses. But a class action lawsuit against a franchisor claiming damages for wages and other injuries does not encourage franchising in areas that likely need it most, nor will prospective franchisees want to do business in such areas.

So, even though franchising may have taken one step forward with the re-instatement of the narrower joint employer liability standard after the McDonald’s USA NLRB decision, it appears that franchisee employees, as they are doing in the Acuna McDonald’s Chicago case, may instead resort to different (albeit related) liability theories of negligence and vicarious liability that could take franchising two steps back. Although attempts to impose liability on franchisors on the basis of negligence and vicarious liability are not new to franchising, Acuna represents another development in the ongoing battle to determine whether franchisors have liability to their franchisee’s employees.

Marc A. Lieberstein is franchise partner, Kitt Shipe is franchise of counsel, and Chris P. Bussert is senior counsel, all practicing at Kilpatrick Townsend & Stockton.