By Cliff Ennico
A lot of ink has been spilled over last week’s ruling, by the Office of General Counsel of the National Labor Relations Board (NLRB), that in the future employees of McDonalds fast-food restaurants with complaints against their employers can bring an NLRB action not only against the owners of their particular franchise outlet, but McDonalds Corp. as well.
Under the NLRB’s “co-employment” rule, employees with grievances can file actions in the NLRB against all persons who employ them. This is the first time the NLRB has taken the position that a franchise company (called a “franchisor”) is a co-employer with its franchisees.
The response to this ruling so far, at least within the small business community, has been overwhelmingly negative: some commentators have said the ruling spells out the “death of the franchise model.”
Well, hold on a minute. Let’s think about this . . .
Virtually all franchise agreements say that the franchisee is an “independent contractor” of the franchisor, not a partner, joint venturer or employee. Some commentators think the NLRB ruling eviscerates that contract provision, turning franchisors and franchisees into business partnerships, but I don’t think so. Two independent contractors could jointly employ someone to work on a project and would be “co-employers” of that person under the NLRB rule without being deemed partners or some other legal relationship.
The bigger issue here is the “indemnification” clause, also appearing in virtually all franchise agreements, by which the franchisee indemnifies the franchisor for any liability the franchisor incurs due to the franchisee’s operation of the franchise outlet.
Whenever I review a franchise agreement, I always try to limit this clause to liability that was “caused” or “resulting from” the activities of the franchisee. If someone slips and falls on a wet floor in a McDonalds restaurant in Boise, Idaho, it is only right and proper that the local franchisee should assume that liability: McDonalds corporate headquarters should not be sued merely because it is a “deeper pocket” than the local franchisee.
But what if the franchise system itself creates a legal problem for its franchisees? As Shakespeare said, “Ay, there’s the rub.” Let’s say, for example, a franchise requires its franchisees to buy all of its supplies from a single supplier run by a cousin of the franchise’s founder. A franchisee is approached by a local competing supplier, who is rejected because of the franchise’s “single source” requirement. The competing supplier complains to its elected officials, and both the local franchisee and the franchisor are sued by the state Attorney General’s office for engaging in an “unfair trade practice”.
Is it fair that the franchisee should be indemnifying the franchisor in such a case? It seems to me that if a franchisee is sued because of the way the franchise system is set up, or because of the “acts or omissions” of the franchisor, the franchisor should be indemnifying its franchisees and dealing with that situation itself, not the other way around.
Sadly, that is not how most franchise agreements are drafted. Whenever I review an indemnification clause, I try to add language requiring the franchisor to stand behind its franchise model and system and protect its franchisees. Sometimes, especially in the case of early-stage franchises who are desperate to add new franchisees to their system and will agree to just about anything, I am successful. Most of the time, I am not.
This is the real problem with the NLRB ruling: by trying to make franchisors more accountable for employment related activities at its franchise outlets, the NLRB has merely created additional headaches for franchisees, by imposing a huge indemnification obligation upon them if the complaint did not result from a franchise policy issuing from corporate headquarters.
In its press release announcing the decision, the NLRB said it has received 181 complaints against McDonalds since November 2012. Of those cases, 68 were found to have no merit, 64 cases are currently pending investigation and 43 cases have been found to have merit. In the 43 cases where complaint has been authorized, “McDonald’s franchisees and/or McDonald’s, USA, LLC will be named as a respondent if parties are unable to reach settlement.”
One hopes that McDonalds will not “shoot itself in the foot” by enforcing its indemnification clause strictly and increasing the legal compliance burden for its franchisees. The right thing would be for McDonalds to inform its franchisees that any NLRB action brought against McDonalds corporate will be defended at McDonalds expense unless it was “directly and solely caused” by the franchisee’s negligence, willful misconduct, or violation of the franchise’s own rules and regulations, as spelled out in the franchise agreement and the franchise’s Operations Manual.
Of course, this would probably raise the price of a Big Mac by a couple of bucks, but the NLRB probably feels that’s a small price to pay for empowering employees who are, after all, near the bottom of the economic ladder.
Cliff Ennico (firstname.lastname@example.org) is a syndicated columnist, author and host of the PBS television series ‘Money Hunt’. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com. COPYRIGHT 2014 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC.