Last week, the legal arm of the National Labor Relations Board (NLRB) issued a press release announcing that it decided to recognize the validity of labor complaints against McDonald’s USA asserting that the national restaurant franchisor should, in some cases, be treated as a joint employer with its franchisees. This decision could have potentially broad and dramatic ramifications. While the NLRB’s announcement itself does not change the law, it opens the legal door to hold franchisors liable for the labor violations of their franchisees.

What Happened?

Last week, the Office of General Counsel for the NLRB announced that it would allow complaints against McDonald’s USA and a number of its franchisees to go forward. The complaints alleged that the franchisor and its franchisees were liable to workers who claimed that they were retaliated against for engaging in legally-protected protests or union organizing. The brief announcement on July 29, 2014, stated that in 43 cases from around the country, the NLRB would authorize complaints to go forward in which “McDonald’s franchisees and/or McDonald’s, USA, LLC will be named as a respondent.” In other words, for the purposes of these complaints, the General Counsel of the NLRB is taking the position that the national franchisor is a joint employer of its franchisees’ employees.

What Are "Joint Employers?"

In the law, sometimes two separate legal entities can be held to be “joint employers.” This means that both entities are jointly liable for the violation of labor and employment laws by the other entity. There are a myriad of state and federal legal tests to determine whether two entities should be deemed to be joint employers, depending on the legal context (e.g., labor laws, discrimination laws, wage payment laws, etc.).

While it is not possible to detail those tests here, a core consideration is how much one entity controls the activities and employees of the other entity. The more control that is exercised by one entity over the employees of other entity, the more likely joint employment is to be found.

Why Is This Important?

For decades, it has been well settled law that franchisors and franchisees generally are treated as separate and distinct legal entities, and not joint employers. This meant that generally, a franchisor cannot be liable for the acts of its franchisees when it comes to violations of labor and employment laws concerning the franchisee’s employees.

This decision by the NLRB marks a preliminary—but significant—challenge to that well settled law. The NLRB’s determination means that it will seek to change the law, at least in some cases in the area of labor relations, to allow franchisors to be held responsible for the acts of its “independent” franchisees. Should the NLRB prevail, this change in the law will likely require significant changes to franchise agreements and to the way franchisors operate and manage risks.

It is important to note that this action does not yet constitute a change in the law. A complaint is not a final decision. Before the franchisor and franchisees could be held to be joint employers, the action will be contested first at the NLRB, and then ultimately in the federal courts.

However, unless and until there is a change in presidential administrations or the composition of the Board, the NLRB has staked out its position on the subject. All franchisors should be vigilant to monitor this issue as it develops in the coming months and years.