Legal shift could alter franchise model

Chain businesses have long maintained a legal wall between the parent company and the people who work for franchisees.

Employee complaints about wages, overtime or working conditions fall not on McDonald's Corp., for example, but on whoever owns the individual restaurants. This bright line in franchise law, upheld for decades by U.S. courts, allows franchise corporations to avoid labor disputes and direct negotiations with workers.

But now, franchisers are in an uproar and labor unions emboldened after the National Labor Relations Board said it will name corporate McDonald's as a "joint employer" when workers make unfair labor practice claims against McDonald's franchisees.

The new stance, announced by NLRB General Counsel Richard Griffin in late July, is rippling through corporate offices in the Twin Cities, home to large franchisers like Dairy Queen, Buffalo Wild Wings, Cost Cutters and Great Clips. Lengthy legal battles are on the horizon.

"It'll go all the way to the Supreme Court, because this is a very important case," said Nelson Lichtenstein, a labor historian at the University of California, Santa Barbara. "A lot of money would be at stake on this question, and both sides would have a very big incentive to take it all the way up."

Griffin explicitly named only McDonald's, but Mike Gray, a franchise attorney at Gray Plant Mooty in Minneapolis, said the new stance, as it works its way to the courts, threatens to undermine the franchise business model.

"If they're going to be held liable for the employees, they're going to have to get involved in the employment decisions to minimize their risk," Gray said. "So that's going to change the relationship between franchisers and franchisees substantially."

"It's what we've been saying all the way along," said Bernie Hesse, of the United Food and Commercial Workers Local 1189 in South St. Paul. "If you're a franchise holder, you are connected to corporate. If you don't use the right uniforms, if you don't use the right food prep, if you don't buy the right products through the pipeline, you get the boot."

The International Franchise Association disagrees. The trade group views Griffin's announcement as a brazen attempt to change legal precedent that is already prompting a wave of costly and time-consuming labor complaints, and getting in the way of job growth.

Great Clips, based in Edina, is the franchiser for 3,700 salons owned by franchisees in the United States and Canada.

The company's president, Steve Hockett, said his concern is not labor complaints or unionization, but the threat to the franchise structure, which has worked well for decades and has been an economic engine for the country.

Great Clips provides the business system to franchisees, but doesn't run the business, Hockett said. If the corporate office is forced to step in and control franchisees' employment practices to avoid being liable for labor complaints, the model will break down.

Brian Stevens, who owns 14 Great Clips locations in the Twin Cities, said he doesn't want the Great Clips corporate office telling him how to handle employees.

"My relationship with my 120 employees is just that, it's my relationship," Stevens said. "I run an independent business. We're small-business owners. We're responsible for every piece of the business and we don't see Great Clips as a joint employer."

The National Labor Relations Board, Dairy Queen, Buffalo Wild Wings, and Regis Corp., which owns Cost Cutters, all declined to make someone available for an interview for this story.

Franchisers do exert some control over franchisees. They set hiring standards, dress codes and lay out all manner of requirements. They often mandate specific software that controls employee work schedules. In some cases, the franchiser has independent access to the franchisee's data.

"The franchise agreement is incredibly detailed between McDonald's in Chicago and the local franchise, telling them just exactly what they can do," said Lichtenstein. "The only thing they ostensibly have any control over is wages, but even there they don't really have it."

In a book published earlier this year, Weil argued that companies have increasingly shed their role as direct employers of the people responsible for their products. Instead they outsource work to small companies that compete fiercely with one another for contract work, driving down wages and eroding working conditions. By arguing that franchisers can be treated as joint employers, the NLRB is pushing the idea that franchised industries are also "fissured," that the separation between employees and the corporate office is largely a fiction.

"Brilliant business model, but rotten for workers," Lichtenstein said.

Franchisers say they are not the same as the contract companies that Weil and the NLRB equate them with.

"By lumping franchising in with professional employment organizations, that demonstrated a real lack of understanding of how the franchise model works," said Gray, the attorney in Minneapolis. "That's why this is so troubling."

So far, the courts agree with franchisers, who breathed a sigh of relief in late August when the California Supreme Court reversed a state Court of Appeals decision that would have made Domino's Pizza potentially liable for the sexual harassment of a worker at a Domino's franchise in Southern California.

Labor organizers dream that the NLRB's new stance will open the door to fast food worker unions that can negotiate directly with McDonald's or Burger King or other franchises.

Franchisers are keenly aware of this possibility.

"The objective of course at the end of the day is to organize larger groups of people all at once, without having to go to individual businesses to do the organization," said Gray, the attorney. "It's an incremental approach. I call it a Trojan horse."

Unions, however, aren't trying to hide what they're hoping for. An SEIU president in Southern California said in a letter to members that fast food workers may someday form a national or international union. Hesse, of the UFCW in South St. Paul, said organizing fast food workers would be more practical if the NLRB stance holds, providing a central rallying point for workers.

"People like to have a singular entity when they're organizing," Hesse said. "And now they can say, 'Look, corporate McDonald's, you have to direct your franchise holders to act responsibly, and you will be held accountable.' "