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McDone: An End to Big Franchised Chains?

You’d be hard pressed to drive a few blocks in any downtown district without seeing one or two franchised businesses. From fast food to coffee shops, franchising is a huge part of business in the U.S.

For those unfamiliar, franchising is the practice of selling your business model and branding to would-be entrepreneurs (franchisees) who then start their own independent business under the banner of the franchisor. For instance, while there are corporate owned McDonalds locations, there are many more locations owned by franchisees—a whopping 83% of all McDonalds around the world.

McDonalds has done very well with this business model. In fact, their stated goal is to increase the number of franchisee run locations to 95% of the total McDonalds worldwide.  With this in mind, the higher ups at McDonalds must be terrified because they’re facing lawsuits from the National Labor Relations Board (NLRB) that could destroy the entire franchisor-franchisee business model.

Making McDonalds an Employer?

Back in 2014, the NLRB brought 43 different cases against McDonalds, arguing that they are a joint employer with their franchisees and are responsible to the employees of those franchisees. Now, two long years later, one of these cases has finally withstood McDonalds’ many challenges to its validity as a case and has been given the go ahead to be seen by a jury—an indication that the judge feels that the facts of the case could go either way.  McDonalds

So what exactly does this case mean for McDonalds? The big allegations are two-fold.  First, McDonalds is a joint employer alongside their franchisees.  In the alternative, the NLRB argues that McDonalds is a joint employer because it has behaved in such a way that the franchisee’s employees reasonably believed themselves to be employees of the McDonalds corporation—a twist on a legal concept known as ostensible agency.

Joint employment is a situation where more than one entity acts as the employer of a single employee, with all the responsibilities that go along with that status. The NLRB’s case on this point has been bolstered by recent changes to how joint employment works in a case this blog has discussed beforeBrowning-Ferris Industries. The argument applying this test has not survived summary judgment—a ruling from the judge on the facts without need to go to a jury.

However, what has survived summary judgment is the NLRB’s ostensible agency argument, bringing this issue before a jury. This argument essentially says that McDonalds is a joint employer because they led the employees of this specific McDonalds to reasonably believe they were their employer through their own act or neglect.

The McDonalds in question was owned by a Hayne’s family. However, the employees all testified that they believed that both they and the Haynes family were ultimately McDonalds employees.  They were required to wear McDonalds uniforms and greeted guests by welcoming them to McDonalds.  All the documents they received read McDonalds and they had to follow “McDonalds Store Policies.”  Most importantly, nobody ever actually told them they didn’t work for McDonalds.  You can see how an employee might be confused.

The argument here is still a tenuous one. California law, applicable since the case is coming out of California, has ruled in a case involving Domino’s Pizza that uniforms don’t show agency by themselves—instead serving to protect the brand.  What’s more, while there is no actual case law saying ostensible agency can’t be used by employees themselves, it is almost always used in cases where an outside party reasonably believes that somebody is making representations within the scope of their agency with a company—making offers that the company they work for has given them authorization to make.

Ultimately, the case will come down to whether a jury believes it was reasonable for the employees to believe they were ultimately working for McDonalds. If they had reason to think that, McDonalds is on the hook as a joint employer.

What Could These Cases Mean?

If a jury decides that Mickey D’s is a joint employer, however unlikely, it could totally change how businesses that franchise out their business model—from 7-Eleven to Dunkin’ Donuts—function. The legal premise would not only open a franchisor up to liability as an employer, it would also open the door to nationwide unionization of that franchise’s employees and all costs that could come along with such a union. At a minimum, these businesses will have to require clear disclosure of exactly who any given worker is employed by.

It took two years to get to the point where this case was given the go ahead to eventually see a jury. It’s likely that it will be many more years before this case sees a final resolution.  With such huge potential repercussions there is no question that McDonalds will take this case all the way to the Supreme Court.  This case, and the many other cases like it, have the potential to change the entire business landscape of the United States.  However, we’re definitely going to have to wait a long while to see if that will be the case.

Jonathan Lurie

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