The National Labor Relations Board is attempting to expand the reach of the National Labor Relations Act once again – this time the NLRB’s Office of the General Counsel authorized formal complaints against McDonald’s USA, LLC, despite the fact that the alleged unfair labor practices occurred in restaurants owned by franchisees, and not McDonald’s. (Franchisees own roughly 90% of the 14,000 McDonald’s restaurants). In announcing that franchisors like McDonald’s may be named as respondents in unfair labor practice charges, the Board not only has rocked the future of the franchise business model, but is also trying to broaden its joint employer test in determining who qualifies as an employer for labor relations purposes.

At its most basic level under the franchise business model, franchisors lease their trademarks to franchisees and allow them to distribute their products or services in exchange for a fee. Franchisors typically have no day-to-day involvement with the operations of the franchisees or control over hiring, firing, and other aspects of employee management. Employee grievances or complaints are usually handled at the franchise-level, thereby insulating franchisors from liability. The Board’s announcement, however, removes this level of protection.

By seeking to charge McDonald’s as a joint employer, the Board is essentially concluding that McDonald’s is involved in the labor relations of their franchisees such that it exerts direct and immediate control over the essential terms and conditions of employment of the franchisees’ employees. Consequently, other franchisors may now be named in unfair labor practice complaints where they too exercise a level of direction and control over their franchisees sufficient to hold them as joint employers, even though the franchisor may not have any involvement whatsoever with their franchisees’ labor decisions.

Probably the most concerning aspect of the Board’s announcement, however, is that it is consistent with the Board’s previously stated intention of broadening the current test for determining the existence of a joint employer relationship. For the past 30 years, a joint employer relationship has been determined by examining whether an entity has “direct and immediate control” over the workers’ essential terms and conditions of employment. The Board, however, seeks a more expansive “totality of circumstances” test which looks at whether the entity wields enough influence over the working conditions of the other entity’s employees such that both entities need to be present for meaningful bargaining to occur. The Board appears to be moving closer toward implementing this new test in announcing that it will charge McDonald’s as a joint employer.

The Board’s announcement has broad implications not just for franchisors in the fast food industry, but also for those who traditionally outsource certain functions, including those in the hotel/motel, convenience store, hair salon, spa, janitorial, and gas station/mini-mart industries. Additionally, franchisors or other employers who outsource may now become more susceptible to union organizing efforts.

During a time when all businesses are seeking to reduce costs, franchisors should take certain steps to avoid joint employer liability. Franchisors should spend time reviewing their franchisor agreements and how they actually follow those agreements in practice to ensure against a possible NLRB finding that they are too controlling. For those franchisors where true separation is not a real possibility, they should consider expending additional time and money in taking a greater involvement in their franchisees’ individual operations to ensure that labor relations are handled appropriately and in compliance with applicable labor laws. In either case, franchisors, to the extent possible and to mitigate their risk, should consider: (i) adding indemnity provisions to their franchisor agreements, (ii) exploring other insurance coverage options, and (iii) having employees execute arbitration agreements that include collective or class action waivers

All business should pay close attention to how the Board proceeds in the upcoming months on the joint employer issue in franchise and non-franchise industries. We’ll keep you posted.