Barry Brecheisen/Eater Chicago
The National Labor Relations Board has decided that both franchisors and franchisees can be held liable for unfair labor practices
In 2019, a group of 1,400 McDonald’s workers filed a lawsuit alleging that their employers had violated California Labor Code’s wage-and-hour regulations by denying workers overtime pay and meal and rest breaks, and by mandating they worked off the clock. The suit also alleged that as “joint employers,” both the Haynes Corporation, the locations’ franchisee, and McDonald’s were responsible. But though the employees and Hanes reached a classwide settlement, the court ruled that McDonald’s was not responsible, as it isn’t involved in “day-to-day operations” of the stores, despite them carrying the McDonald’s name.
From 2020 to 2023, this is how it went — labor law insulated corporate franchisors from liability for what goes on at individual franchise locations. But on October 26, the National Labor Relations Board (NLRB) issued clarification on the joint employer rule, deciding that both franchisors and franchisees can be held liable for unfair labor practices.
Although it seems like a finer point of federal labor law, this change could have major implications for big restaurant chains, especially when it comes to union organizing and complaints of harassment or systemic safety issues. The agency rule has long been a sticking point for workers seeking compensation for injuries or the opportunity to collectively organize a union. Industry lobbying groups are furious about the NLRB’s decision, which they say will have a disproportionate impact on restaurant franchise owners.
What is the joint employer rule?
The joint employer rule is a rule issued by the National Labor Relations Board that governs how two different businesses might be liable for unfair labor practices. In the restaurant industry, that means franchisors, like McDonald’s and Chick-fil-A, which enter into agreements with franchisees who operate their restaurants. Most fast-food chains operate under the franchise model, which means that, in the eyes of the law, the workers are “jointly” employed by both the parent company and the franchisee that issues their paychecks. (Some fast-food chains, like In-N-Out, are entirely corporate-owned.)
The franchise model creates a complicated structure when it comes to who can be held liable when a business is accused of violating federal labor law. Often, this structure results in lengthy legal battles in which the parent company insists that they are not liable for infractions committed by the franchisees that they work with. In April 2020, President Trump’s NLRB issued the new “joint employer” rule, which imposed strict limits on how corporations could be held liable for labor violations at franchisee-run businesses. As Eater reported at the time, the rule helped insulate these corporations from liability in sexual harassment complaints and workers’ compensation payments. Experts also suggested that the rule could hinder collective bargaining in the fast-food industry, because workers at different McDonald’s locations were technically employed by separate entities.
The 2023 update to this rule makes both the franchisor and the franchisee liable for unfair labor practices. It also requires that both entities engage with any union that represents these jointly employed workers and allows unions to target both a parent company and its associated entities with “picketing or other economic pressure if there is a labor dispute.” In a statement issued by the NLRB announcing the update to the rule, board chairman Lauren McFerran described the change as a “legally correct return to common law principles, and a practical approach to ensuring that the entities effectively exercising control over workers’ critical terms of employment respect their bargaining obligations under the NLRA [National Labor Relations Act].”
How do employers feel about the joint employer rule update?
In its report, Restaurant Business, a restaurant industry publication that is partnered with the National Restaurant Association (NRA), said the rule came “as feared.” Organizations like the NRA, the International Franchise Association (IFA), the American Hotel & Lodging Association, and others have come out against the rule. Their argument is that each franchise location is an independently run business, able to make its own decisions about things like workplace conditions and schedules, and so the corporate entity shouldn’t be liable for what happens at each store.
“Today’s final rule is a heavy blow to small business restaurant operators,” Sean Kennedy, executive vice president for public affairs at the National Restaurant Association, said in a statement. “The rule upends employment policy, adopting a far-fetched definition of ‘employer’ based on ‘indirect or potential influence’ of an employee and then fails to define how ‘indirect control’ will count toward a joint employer relationship.” (In fact, the NLRB takes great care to define how a corporate entity’s influence would be characterized as indirect control.)
Corporations do dictate much of day-to-day operations at any given franchise. As the FTC notes, franchisors can tell franchisees how to advertise, what’s on the menu, and from which companies they can buy their supplies. But things like setting employee schedules, and hiring and firing, do remain up to the franchisee. With this rule, the NRA and others are worried that corporate restaurant headquarters would be held accountable for things they have no control over, like a franchise employee harassing a colleague or a manager not paying overtime, and be subject to increased lawsuits as a result.
It’s a little suspect to think you can have your corporate name on restaurants across the country and yet somehow not be responsible for what goes on in them. But the deeper concern for franchisors and franchisees is about unionization. As the NLRB states in a fact sheet, “For the purposes of collective bargaining, once an entity is deemed a joint employer by virtue of its control over one or more essential terms and conditions of employment, it will be required to bargain over those particular essential terms and conditions as well as all other mandatory subjects of bargaining that it possesses or exercises the authority to control.” That means corporate headquarters, not just the franchise owners, would be on the line to bargain with franchise workers.
“NLRB’s goal is to coerce businesses to the bargaining table with workers they do not actually employ to artificially increase unionization,” AHLA President & CEO Chip Rogers said in a statement. “This dramatic shift will effectively dismantle the franchise business model — the single greatest avenue to successful entrepreneurship in American history and a system that has helped our industry build millions of well-paying jobs and careers.” The AHLA has filed formal comments with the NLRB, and the IFA has called on Congress to reject the rule.
How do franchisees feel about the joint employer rule update?
Some franchisees are also concerned about the new rule, which could change the way that they interact with the brands that they license. The IFA says this new rule will open franchise owners up to more lawsuits and “less support from their brands.” In a statement on the rule, Michael Layman, IFA senior vice president for government relations and public affairs positions this as an issue of supporting mom-and-pop businesses. “Franchising is a pathway to entrepreneurship for all Americans, especially women, people of color, veterans, and first-time business owners. Nearly a third of franchise owners say they would not own their own business without franchising, and this attack on the franchise model would shut the door of opportunity to thousands of would-be entrepreneurs.”
Franchisors have long touted the franchise model as an easy, accessible path to small business ownership. But the reality is a little more complicated. About 46 percent of franchise owners are single-unit owners, but the majority of franchises are run by multi-unit owners. According to Layman, the vast majority of franchise owners that his organization represents oppose the rule, and he says that the IFA was a “strong supporter” of the 2020 “direct control” rule issued by the Trump-era NLRB.
“This is a huge change of rules in the middle of the game for franchise owners,” Layman told Eater. “If this policy cannot be struck down, there are two things that can happen. One is that franchisors will feel compelled to impose more control over their franchisees in the name of liability. The second option is that they may decide to distance themselves from their franchisees in order to avoid unnecessary liability. That erodes the franchise value proposition either way.”
Layman’s view is that the new rule is too broad, and he says he’s concerned that the rule could impact all sorts of business relationships, not just interactions between franchisors and franchisees. “The NLRB wants to change this business model for the benefit of organized labor, and they do not care about the collateral damage of franchise businesses and other kinds of contractual relationships as the result of this policy.”
How does the joint employer rule update affect fast-food workers?
According to the IFA, about 8.5 million people are employed at franchises across the country, with full-service restaurants, quick-service restaurants, and other food services making up a significant portion of employers. But the previous rule kept many franchise employees from organizing: In 2019, the NLRB ruled in favor of McDonald’s against workers who had been fired or retaliated against for trying to unionize, who asked that the company be considered a “joint employer” with franchise owners. Recently, workers at a Cincinnati location of Dunkin’, which operates on the franchise model, filed to unionize with the Bakery, Confectionery, Tobacco Workers, and Grain Millers International Union, but withdrew the request last month. Restaurant and fast-food unionization efforts have mostly been contained to company-owned businesses, like Starbucks and Chipotle.
But with the ability to bargain directly with the corporations behind the franchises, a major hurdle toward unionization becomes surmountable, and organizing could happen bigger and faster. As the AFL-CIO said in a statement, “the point of the rule is simple — when workers negotiate for fair wages and working conditions, companies shouldn’t be able to hide behind a subcontractor or staffing agency to deny us what we’ve rightfully earned.”
