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Franchisor May be Included in Labor Violation Disputes

August 14, 2014

On July 29, 2014, the General Counsel of the National Labor Relations Board (“NLRB”) announced that McDonald’s USA may be held accountable as a “joint employer” for alleged violations of the National Labor Relations Act (“NLRA”) by a number of McDonald’s franchisees. The announcement can be read here.

In 43 cases currently pending before the NLRB, complaints against both the McDonald’s franchisees and McDonald’s USA, the franchisor, will be issued unless settlements can be reached. The announcement issued by the NLRB General Counsel does not in itself hold McDonald’s USA liable for the acts of its franchisees, nor is it a “ruling” by the NLRB regarding franchisor liability. It is simply a statement that the NLRB has authorized the filing of administrative complaints for labor violations against McDonald’s USA as well as a number of franchise restaurants across the country.

Many franchise law experts are calling this approval an unprecedented deviation from the legal insulation normally afforded to franchisors for the labor-related decisions of their franchisees. Franchisors are legally separate entities from their franchisees. Pursuant to the NLRA’s current standard, one entity may be held accountable as a “joint employer” for labor violations of a separate entity if it exerts “direct and immediate control” over the employees at issue. In other words, joint employment only exists when both entities are able to determine key conditions of employment. Examples of “direct and immediate control” may include exerting influence over hiring and firing decisions, employee discipline, and the direction of employees’ day-to-day activities. At this time, the NLRB has not released any decision or memorandum setting forth a new standard for determining joint employer status.

While the NLRB McDonald’s cases have the potential to impact many industries that utilize franchise-based business models, it is premature to predict what reverberations, if any, may be felt within the real estate profession. Nonetheless, because of the inherently independent nature of the real estate profession, real estate franchisors generally leave day-to-day corporate decision-making, employee-related administration, and overall managerial processes up to their franchisee brokerages. Therefore, although we do not yet know the rationale behind the NLRB’s decision to name McDonald’s USA as a joint employer or whether the court will acknowledge that basis of liability as a joint employer, it is unlikely that the “direct and immediate control” currently required by the NLRA in order to find joint employment would translate to most, if any, real estate franchise models.

Finally, it should be noted that the NLRA does not apply to independent contractors. Because most real estate brokerages engage salespeople as independent contractors, the employment-related disputes at issue in the McDonald’s NLRB cases do not apply to the majority of broker-salesperson relationships. That said, brokerages’ employed office support staff, administrators, and employee-status salespeople are covered by the NLRA.

NAR Legal Affairs will be closely monitoring the McDonalds NLRB cases, and publishing updates as new developments arise.