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Why the Federal Ruling on McDonald's Just Turned Franchising Upside Down

The National Labor Relations Board says McDonald's is the joint employer of franchise workers--and that could mean a lot of confusion and problems for franchise owners.
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In a move that could ultimately have a huge impact on all franchising, the general counsel of the National Labor Relations Board has said that McDonald's is the joint employer of workers at its franchise locations. If ultimately upheld, that could put McDonald's at the epicenter of class action suits over fast food worker wages and working conditions.

Traditionally, franchise owners themselves were considered sole employers of their workers. Because they operated as separate legal entities, franchisers were isolated from any labor disputes. By declaring that McDonald's is a joint employer, the NLRB has shaken that structure.

"Corporations that exercise sufficient control over their franchisees cannot claim ignorance," said Catherine Ruckelshaus, general counsel and program director for the National Employment Law Project, in a Tuesday conference call held by the organizations supporting the lawsuits. "This accountability means ensuring that the franchises comply with the basics of the law."

Even though any ruling would for now be restricted to McDonald's, other franchisers might decide to change their business models and end franchising over worries about even the potential of labor issues.

"If a franchiser is now a joint employer, will that franchiser continue franchising or will they only open corporate locations?" said Matthew Haller, a spokesperson for the International Franchise Association, to Inc.com. "If they have to be responsible for setting wages and employees, why be a franchiser?"

Attorneys for McDonald's workers have filed class action suits in three states claiming that the company was responsible for illegally withholding wages in a number of ways, including calling people in but not paying them for all the time they were required to be in stores as well as charging for the costs of uniforms.

McDonald's has argued that it was not responsible and should not be involved in the case because the employees in question worked at franchise locations. Under the NLRB determination, that defense could potentially fall, leaving the central company as a co-defendant in a potentially extensive and expensive legal action.

If franchisers are considered joint employers, franchise owners face a number of questions that could have an impact on their businesses. Would the IRS continue to treat employee compensation and other related expenses as legitimate expense deductions for franchisees?

Haller brought up other potential issues: "Who are [SBA] lenders doing business with now? How will this be interpreted within the [Affordable Care Act]? The small-employer definition within the ACA is 50 employees, and this could make a further mess of the employee mandate."

IMAGE: Getty Images
Last updated: Jul 29, 2014

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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