Can a franchise chain be held liable for the unlawful employment practice of one location?

Traditionally the answer to this question has been “no” unless the chain participated in the practice. (Hence one reason for a business to operate as a franchisor) However, recent charges by the National Labor Relations Board against McDonald’s USA, LLC, suggest that chains should expect increasing efforts to impose broader penalties for the acts of their franchisees.

Franchise arrangements typically involve a franchisor corporation owning trademarks and other intellectual property for a retail business and devising the policies and procedures by which individual locations are run. The franchisees are independent owners that pay a franchise fee and/or royalty to run a location, license the intellectual property, and utilize the policies and procedures created by the franchisor. Franchisors often have a vested interest in supervising the franchise locations, exchanging information and data on a shared computer network, and assisting in the smooth operation of the franchises, including their ability to find and employ qualified personnel.

In the past, courts have, by and large, acknowledged that employment laws do not lump together a franchisor with its franchisee when the franchisee has engaged in unlawful conduct toward employees. For example, courts have recognized that a franchisor is not liable for sexual harassment by a franchisee against its employee, or for failure to appropriately pay wages, unless the franchisor was directly involved in the unlawful practice. This is particularly significant in recent years as many employment statutes, such as the Family and Medical Leave Act, apply only to employers of a sufficiently large size. (The FMLA, for example, only applies to employer locations employing 50 or more employees within a 75-mile radius.)

Recently, the law appears to be changing in this regard. In 2014, the Service Employees International Union began a campaign against the McDonald’s restaurant chain entitled “Fight for $15” in which employees and labor advocates engaged in strikes around various McDonald’s restaurants demanding that wages be raised to $15.00/hour. The SEIU claimed that many franchisees responded by engaging in retaliatory conduct against participating employees and unionized employees, and that McDonald’s corporate office was involved in this retaliation. Based on these allegations, the General Counsel of the National Labor Relations Board (NLRB) has brought 78 Unfair Labor Practice (ULP) charges against McDonald’s USA, LLC, and McDonald’s franchisees.

Additionally, in the State of California, the legislature passed a bill last year that would have strictly regulated the terms of a franchisor’s business relationship with its individual franchisees. Among other things, the statute would have prohibited certain terms often imposed by franchisors, and limited their ability to end franchise relationships and prevent the sale of franchises to third parties. This bill was ultimately vetoed by Governor Brown, but all indications are that similar bills can be expected in the future.

As a result of these recent developments, businesses involved in a franchise relationship (both franchisors and franchisees) should exercise increased caution regarding employment law issues. A small business running a franchise may later discover that it is subject to employment laws it previously thought were inapplicable based on its inclusion as a “joint employer” with the franchisor or other franchisees. In considering these issues, businesses should consult with employment counsel regarding questions concerning the franchise relationship.

The above is for information purposes only and does not constitute legal advice.