skip to content
blog home Start a Franchise The NLRB Joint Employer Decision: A Potentially Devastating Blow to the Free World

I understand that the title of this article is somewhat dramatic and I agree that it is – but I am also concerned. The concern that I have is not as an advocate for the franchise business model but as an advocate for entrepreneurship and the impact that this decision may have on small businesses throughout the country.

Consider the thousands upon thousands of small business owners who buy a franchise. These small business owners:

  • Invest and risk their savings to create a business for their families;
  • Are motivated to do more and work for themselves;
  • Want to build a lasting asset that serves their families, communities, and employs people in the process.

So, for example, a soon to be entrepreneur and business owner signs a franchise agreement and starts his or her own business

The advantage of buying a franchise is a recognized brand and systems for operation, but the risk of failure and benefits of success still rest with this franchisee business owner.

The efficiencies of franchising made this happen, that is, this franchisee entrepreneur is risking his or her own savings and starting a business that he or she will operate, but the franchisee does so with a license to the franchisor’s brand and system.

What Is The NLRB?

The National Labor Relations Board is a federal agency governed by a board of five members and a general counsel. This board is appointed by the President of the United States and, generally, is comprised of a political configuration that typically reflects the affiliation and beliefs of the President of the United States. The NLRB is a quasi-judicial entity and possesses the jurisdiction to investigate and adjudicate cases involving the unions and unfair labor practices.

So, What Happened at The NLRB? What is the Big Deal

In 2014, there were various protests and fast food worker campaigns protesting their wages, many of these protests involved McDonald’s employees. A proceeding was commenced and investigation initiated by the NLRB into McDonald’s response to the protests and whether or not McDonald’s, in its response, engaged in unfair labor practices.

So far, what I have described is not a big deal, but what comes next can have a significant impact and overturn the franchise industry as we know it. You see, rather than just proceeding against the McDonald’s franchisee owners (the owners of the McDonald’s locations where these alleged unfair labor practices occurred), the NLRB has also proceeded against McDonald’s corporate and has held McDonald’s corporate to be a joint employer. This past December, the NLRB issued its joint complaints and the hearings are scheduled for March, 2015.

Franchising as we Knew It: Not A Joint Employer?

Consider that:

  • Franchising is a contractual relationship defined by a franchise agreement;
  • A franchisee obtains the license and right to utilize a franchisor’s brand and system;
  • The franchisee – after it signs a franchise agreement – uses his or her own capital to establish the franchise location that he or she directly manages;
  • The franchisee owns the franchised business and one of the assets that he or she possesses are the rights granted into the franchise agreement;
  • The franchisee hires and pays employees and determines who he or she hires, who to promote, and who to give raises to;
  • The franchisee is the known employer as to both state and federal employment taxes; and
  • The franchisee was the employer and the franchisor, well, the franchisor was the franchisor and certainly not an employer.

What did the NLRB Decide?

Well, this board decided that not only was the McDonald’s franchisee an employer, but that McDonald’s corporate was also an employer – a joint employer. That is, the franchise company is responsible and liable for the employment decisions of its franchisees. Specifically, counsel for the NLRB stated, in part:

Our investigation found that McDonald’s, USA, LLC [the franchisor], through its franchise relationship and its use of tools, resources, and technology, engages in sufficient control over its franchisee’s operations, beyond protection of the brand, to make it a putative joint employer with its franchisees, sharing liability for violations of our Act…

Why Is This a Devastating Blow?

Well, for starters, it undermines and unsettles the entire foundation of the franchising business model. It creates uncertainty and potentially negates thousands upon thousands of existing franchise agreements that are relied upon by business owners throughout the country.

The worst part is that, although it may benefit unionization efforts, it undermines job creation and undermines the ability of small business owners to start their own franchised business. Consider that this decision will require franchisors to potentially take a defensive position and take over and exert control over a franchisee’s employee decisions and management. This will increase costs as the franchisor will be required to micromanage the franchisee’s operations (operations that are more efficiently managed at the local franchisee level) and this increased cost will reduce the franchisee’s profits, make the franchised business less competitive (because the franchisee’s franchised business will be subjected to national employment and union claims, unlike independent businesses) and, overall, place the franchisee owner at a competitive disadvantage.

Ironically the NLRB decision could undermine franchisee rights and, eventually, relegate franchisees into glorified employees that risk their own capital to just buy themselves a job.

Sure this decision benefits unions, i.e., they now have deeper pockets to go after (in this case, corporate McDonald’s) but the small business owner/the franchisee will be relegated to the sidelines and eventually pushed out of entrepreneurship.

It’s a tough situation where it seems that politics and political decisions strengthen big unions and big business and in the middle is the small business owner and entrepreneur who just so happen to be the job creator.

End of the free world…? I don’t think so, but damaging nevertheless.

Related Articles:

By Charles Internicola January 20, 2015

Franchising Guides

The Ultimate Guide to Franchising Your Business

New to franchising? Do you want to learn more about franchising your business, where to start, the steps, and how to know if you are doing it right?

Learn More

Is Your Business Franchisable and Should You Franchise?

Franchising may be the next big step for your business and represents an opportunity to grow your brand. So, how do you know if franchising is right for you? How do you know if your business is franchisable and, if it is, whether or not you should franchise your business? To answer these questions you must evaluate whether or not your business is franchisable and, if it is, whether or not your individual goals and your business goals align with franchising and establishing a franchise organization responsible for on-boarding, training, and supporting franchisees.

Learn More

Licensing Vs. Franchising

When considering expanding a business both franchising and licensing are possible options. Each option however comes with different rules and regulations. Prior to moving forward with franchising a business or licensing a business it is important to understand the differences and how each may have an affect on you.

Franchise Lawyer Charles N. Internicola wrote “Licensing versus Franchising” for the very purpose of allowing successful business owners to understand the difference between licensing a business and franchising a business.

Learn More

Guide to Selecting a Franchise Lawyer

If you have questions about franchise lawyers, what they do, how they can help, the cost, and how to select the right franchise lawyer for you, then this guide will help.

Franchise lawyers advise and represent individuals and businesses on legal issues that involve franchising a business, preparing an FDD, filing and renewing FDD registrations, buying a franchise, and litigation involving the franchisor and franchisee relationship. The role of a franchise lawyer varies depending on whether he or she represents the franchisor or the franchisee.

Learn More

Item 19 Financial Performance Representations

Check out our guide where we discuss how to plan and properly disclose Financial Performance Representations in your FDD.

Learn More

Franchise Sales Compliance Guide

Are you a franchisor or a part of a franchise sales team? Do you want to learn more about franchise sale compliance and ensure that your sales practices comply with franchise laws and are consistent with best practices? Then this guide is for you.

In this guide you’ll learn the fundamentals of franchise sales compliance including the franchise laws, regulations, and best practices that your team should have in place for every franchise sale.

Learn More
Close Overlay

Let’s Talk

With services to make your growth strategy simple, cost effective, and with a team excited to help you, let’s talk about how we can help grow your business.

Fill out the following form and we’ll contact you as soon as possible. To reach our team directly, give us a call at (800) 976-4904.