This summer, the general counsel of the National Labor Relations Board (NLRB) sent shockwaves through the boardrooms of franchisors. The NLRB’s head lawyer issued a memorandum on 180 pending unfair labor practice complaints against the fast food chain McDonald’s and its franchisees which directed the Board’s regional offices to treat the McDonald’s franchisor and franchisees as “joint employers” in 43 of the charges. If approved by the courts, this could lead to liability of McDonald’s as franchisor for the personnel practices of its franchisees.
The memorandum made headlines for good reason. Many commentators dismissed it as the Obama administration’s attempt to aid the union-led assault on the fast food business for higher wages. Regardless of motivation, the NLRB position could have a major impact on the relationships between franchisors and franchisees in many industries.
Many will dismiss the impact of the NLRB’s position on the car business contending the franchise agreements of all major factories contain language that dealers are independent contractors and are not agents or employees of the franchisor. However, McDonald’s agreement with its franchisees contains similar language. According to the NLRB general counsel, the reality of the relationship must govern over the words of the franchise agreement.
Many franchisors have been exercising greater control over the operations of franchisees to require standardization. While politics may have played a part in the NLRB GC memorandum on McDonald’s, the rules imposed by that franchisor on what staffing software to use, dress code, and employee practices could have been even more influential.
If you still think this rationale doesn’t apply to the car business, ask yourself the point of manufacturer programs over the last decade to standardize brand image and dealer practices. Many have been so detailed that they have specified the dress code for employees and how employees are to greet customers. And what about direct manufacturer compensation to dealer employees? Over the years, many manufacturers have tried to impact dealer performance by establishing direct pay and bonus programs for dealer salespeople and sales managers who meet goals set by the franchisor. A few years ago, Maryland enacted legislation to limit the compensation a manufacturer can pay directly to a dealer’s employees. The kickback by some franchisors was swift and vindictive, leading to repeal of the law in the state’s next legislative session.
So what does the NLRB GC memo mean for the car business? Will the NLRB regional offices force settlements from McDonald’s restaurants who wish to avoid a confrontation? Will McDonald’s challenge the NLRB in court cases to seek guidance on the validity of the NLRB position? It is hard to say. The courts have been less than receptive for many of the recent envelope-pushing theories of federal administrative agencies, particularly the NLRB. The only thing that is certain is that the NLRB’s position should have the franchisors asking what increasing control over franchisee actions will mean for potential franchisor liability.
The memo indicates that the NLRB is watching the increasing control over franchisee operations, and it is questioning the ability of franchisors to claim they are separate from their franchisees when problems arise. Earlier this year, GM announced a controversial requirement for technician timekeeping that would have applied not only to warranty labor time but also customer pay labor time. Recently, the company retreated somewhat and revised its position. GM attributed its move to the negative feedback from dealers, but one should ask whether it also was concerned about the NLRB’s increasing scrutiny of franchisor control.
A dealer in discussions with its manufacturer over increasing attempts to standardize dealer activities contrary to local business practices and good business sense may want to remind the manufacturer that the more it blurs the lines in the franchisor/franchisee relationship, the more risk it runs of being answerable for potential lawsuits.