McDonald's Ruling Complicates Franchising


The franchisor-franchisee relationship might get a whole lot more complicated.

Earlier today, the National Labor Relations Board told McDonald's that it could be considered a "joint employer" of workers at franchisee-owned restaurants—meaning that it is partially liable for the workers its operators employ.

This is an odd decision—indeed, McDonald's told the Associated Press that it had never been ruled a joint employer before. Yet it will nevertheless have a significant impact on the franchisor-franchisee relationship and could well alter the very concept of franchising.

Here's why: The franchisor-franchisee relationship is a contract. A franchisor sells to the franchisee the right to operate its brand name, in exchange for an up-front payment and then, usually, a percentage of sales in the form of royalty payments. Under this contract, the franchisor has considerable say in how the franchisee operates that business. Some franchisors have more stringent requirements than others.

In the vast majority of cases, the franchisee owns the business. And the franchisee is therefore the employer, hiring people and firing people. Indeed, labor is one of the primary tools an operator uses to make the business more efficient. It gives that operator control in how the business is organized and run. 

This has always been the trouble with criticisms of fast food chains who point to the pay of their top executives—notably McDonald's Don Thompson—versus the pay of their bottom-wrung workers. The vast majority of those workers in McDonald's case have been employed by the franchisees, who set pay and are responsible for health care and other benefits. Franchisors usually do little in the way of determining how much those workers get paid.

By making McDonald's a "joint employer" of these workers, the National Labor Relations Board is giving the franchisor some direct responsibility for the pay and treatment of these employees. That's a significant change. And it takes some of the control of the business away from the franchisee.

This means that McDonald's will have to be very deliberate about the way in which its franchisees pay and treat employees. It could force the company to dictate how much those workers get paid, and how many workers will be on a shift at a time. This will almost certainly have implications far beyond this franchisor, too, as it gets used as precedent in other franchise cases. And after all, McDonald's is nothing if not a symbol for the entire franchise business model.

The decision could limit the growth of the franchise sector overall, especially in the restaurant business. As it is, fewer up-and-coming restaurant chains are using the business model, opting instead to follow the Chipotle example. Why would a company use the business model now if it's just going to be partially liable for all those employees, anyway?

The decision was widely applauded by labor groups, who have been pushing fast food chains, in particular, to raise wages at a time when restaurants represent an unfortunately significant percentage of the new jobs created since the recession.

Not surprisingly, groups that represent restaurants and franchise companies were quick to criticize the ruling. The International Franchise Association said that franchisees "would lose control of the operations and equity they worked so hard to build." The association said the value of these businesses would diminish, which is true because fewer people will be eager to buy a business in which they have less control over such a key cost as labor.

The National Council of Chain Restaurants called the decision "wrong headed" and said it would have "a negative impact on the growth of small business in America."

And the National Retail Federation didn't much like the ruling, either, saying that the agency "lost all credibility as a government agency established to protect workers and is now just a government agency that serves as an adjunct for organized labor, which has fought for this decision for a number of years as a means to more easily unionize entire companies and industries."

The decision will be appealed, and McDonald's will likely fight pretty hard to reverse the ruling. But if it stands, things are going to get a lot more complicated at restaurant franchises.

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