The nationally recognized companies McDonalds, Dunkin Donuts, 7-Eleven, Hampton Inn and Subway have built success by franchising their business locations. Individuals and businesses buy the rights and pay royalties to open up a franchise, and in turn share in the benefits of established brand recognition and proven business model. Traditionally, when a franchise location encountered legal trouble, only the licensee of that franchise could be held liable. However, a recent National Labor Relations Board (NLRB) decision issued in December 2014 has demonstrated the potential to change where the liability lies between a corporation and its franchisees.
Since November 2012, employees have filed over 291 complaints against McDonald's alleging that certain franchises and the company, infringed upon workers' rights by violating wage and hour laws, as well making statements and taking actions against employees for participating in nationwide protests and other activities to improve their wages and working conditions. The NLRB issued an opinion finding that McDonald's Corporation (90% of its U.S. restaurants are franchises), may be considered a joint employer of the aggrieved workers. The NLRB stated that McDonalds "engages in sufficient control over its franchisees' operations, beyond protection of the brand, to make it a putative joint employer with its franchisees, sharing liability for violations" McDonald's orders its franchise owners to strictly follow its rules on food, cleanliness and employment practices. McDonald's often owns the restaurants that franchisees use. The control McDonald's exerted over its franchise locations was so significant, it was apparent that the company was in charge and control of the day-to day location operations. McDonalds, as well as several of the franchise restaurants are appealing this NLRB determination.
In the meantime, this ruling has lent clout to similar action. Recently a New York judge ordered Emstar Pizza Inc., a business which owns several Papa John's franchises, to pay $800,000 back to workers who were denied regular and overtime pay due to Emstar's illegal compensation practices. Now, New York Attorney General, Eric Schneiderman, is pursuing John Schnatter, the owner of the Papa John's Pizza chain, under the NLRB precedent that a chain may also be held liable as a joint employer for the illegal acts of its franchise locations. This is legally unprecedented territory, and major changes to the industry can be expected. If you have any questions about the current legal status of your franchise or if you are a franchisor, please contact Hardin Thompson, P.C.