Joint Employer Liability on the Rise.

In a recent decision, the National Labor Relations Board (“NLRB”) Office of the General Counsel determined that McDonald’s USA, LLC, as the franchisor, could potentially be held liable for the actions of its franchisees under the “joint employer” theory. The General Counsel’s decision has authorized numerous unfair labor practice complaints based on alleged violations of the National Labor Relations Act (“NLRA”) to potentially proceed against both the franchisor and franchisee entities.

Liability of the franchisor for the wrongs of the franchisee is not new. Typically, premised on actual and apparent agency theories, there are reported opinions on franchisor vicarious liability in every jurisdiction for a wide variety of claims including: franchisee fraud, conversion and misrepresentation; personal injuries on franchisee property; product liability claims; consumer protection laws and deceptive practices; environmental clean-up liability; claims under the ADA; civil rights claims, etc. To find liability, courts have historically focused on whether the franchisor controlled, or had the power to control, the overall business of the franchisee. More recently, some courts have narrowed the focus on whether or not the franchisor had control, or the ability to control, the particular instrumentality or activity that allegedly caused the harm or committed the violation. In joint employment cases, that test was typically measured by whether both franchisor and franchisee exercised direct or indirect control over significant terms and conditions of employment.

So, if there has always been franchisor potential for liability of the acts or omissions of the franchisee, why is the McDonald’s case news? Because, until now, franchisors have been rather successful in avoiding liability for the run-of-the-mill disagreements among employees and the franchisees. But the tide is turning and the NLRB General Counsel is winning its argument that the existing joint employer standard should be abandoned in favor of adopting a new standard that takes account of the totality of the circumstances.

Will this ruling have franchisors, parent companies and prime contractors scrambling to exercise less control over their franchisees, subsidiaries or subcontractors’ operations in an attempt to avoid liability? Or understanding that joint liability is more likely, will franchisors, parent companies and prime contractors seek to exercise more control and provide more oversight of the day-to-day tasks of their franchisees, subsidiaries or subcontractors? Companies that pursue more direct input into wages, hiring decisions, terminations, disciplinary actions and other tasks that had historically been left to the discretion of the franchisees, subsidiaries, or subcontractors, will also thereby increase the chances that they are treated as joint employers. This was true in McDonald’s case where employees were able to show that McDonald's provided software to franchise operators that tells them how many employees should work at any given time, and also provided advice on how much employees should be paid.

It also remains to be seen whether the NLRB will more actively pursue “joint employer” cases against parent companies or corporations that would otherwise not have been included in the earlier definition of “employer” under the NLRA. Only time will tell if the Equal Employment Opportunity Commission or Department of Labor will follow the NLRB General Counsel’s lead.

The McDonald’s case just underscores the importance of franchisors, parent companies, and any company that uses temporary agencies, subcontractors, leased employees, or others to perform work or services to fully understand and address joint employer liability in their contracts, to include appropriate indemnities and mandate procurement of insurance to help guard against the ever increasing risks.

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