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Expect the unexpected after NLRB’s latest


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Anyone in the world of franchising who was not comatose this summer knows the general counsel of the National Labor Relations Board announced its intention to charge McDonald’s as a “joint employer” with its franchisees in a series of unfair labor practice claims arising from protests raised by some of the franchisees’ employees. 

That dispute is a long, long way from producing a holding by an authoritative body, administrative or judicial, which will have precedential value. But that has not prevented a deluge of commentary and speculation, some more informed than others.

For franchisors, the factual context and the nature of the issues is less important than the fact that a government official has chosen to ignore the traditional separation of the franchisor and the franchisee, a separation that both parties have accepted and welcomed. 

This action has ramifications that reverberate in both business and legal contexts. This attack is part of a wider assault on companies that have, for business reasons, chosen to organize their affairs by having a portion of their activities conducted by third parties (by outsourcing, by franchising or otherwise).

It has begun to dawn on some observers that this attack on the separate legal identities of the two parties could echo across a wide array of other federal, state and municipal regulatory schemes, as well as in the treatment of private “vicarious liability” cases. (See also the action by Seattle, treating franchisees like franchisors, and differently from independent operators, for purposes of imposing a raise in the minimum wage.)

The sharks have detected blood in the water, and we can now expect a parade of public and private complaints taking their cue from the NLRB dispute, despite its early stage. Almost without regard to its ultimate resolution, the myriad other actions will have been initiated, and with unpredictable results. “Cry havoc,” wrote Shakespeare, “and let slip the dogs of war.”

But it doesn’t stop there. Some of the commentary has been along the lines of, “Unlike some of the other types of companies affected by this movement, franchisors are unable to respond by simply picking up their operations and shifting them overseas.” The unspoken assumption in that observation is outside the borders of the United States, the problem evaporates.

Wrong. In fact, franchisors cannot afford to take their eyes off this issue anywhere in the world.  A few examples:

• Canadian courts and officials charged with adjudicating employment standards have shown receptivity to the imposition of liability on franchisors for their franchisees’ actions. At least one multinational franchisor has been named in a human rights complaint there.

• In Germany a franchisee without employees was required to pay statutory pension insurance (more onerous than under a private pension plan) as if financially dependent on the franchisor (that is, having “employee-like status”).  A court has reversed the holding, but there are doubts as to the viability of that reversal.

• France has a set of difficult (some would say draconian) employment laws, which non-French employers are anxious to avoid. In 2011 the Supreme Court held a German company to be a joint employer with its French subsidiaries, due to its involvement in the operations in France. In July of this year the Supreme Court rejected a similar holding by the Court of Appeal, where the foreign (U.S.) company had treaded with much greater care, a useful reminder of the narrow line franchisors must walk.

In virtually every country’s legal system, the formulation is roughly what we find here:  Yes, the franchisor and the franchisees are legally separate, but actions by franchisors—typically, essentially exercising more control than is deemed necessary—can lead courts to set aside that “separateness” and hold the franchisee or the franchisee’s employees to be employees of the franchisor; or, depending upon what is at issue, hold the franchisor liable for the conduct in question.

It remains true that in a number of countries, because of either a legislative or judicial stance, there is little to no chance of such a result. Commentators describe that prospect as “low risk”; “very little risk”; “there should be no risk”; “extremely unlikely”; “only a slim possibility”; or, simply, flatly: “No.”

In other countries, the result may hinge upon whether the franchisor has taken the precaution of inserting an added layer of protection:  an “enterprise agreement,” a workplace agreement registered with the federal government (Australia); or a provision called “absence of labor relations and non-representation” (Mexico); or a “declaration of independent contractor status” (Netherlands).  In several countries avoiding the undesired result can largely be achieved by requiring the franchisee be organized in a particular type of entity.

But in a number of countries, including some major potential markets for franchisors, the risk is very real. Consider, for example: Indonesia or Finland where, even in industries where it is necessary to dictate far-reaching requirements to maintain quality control, “equilibrium” must nonetheless be maintained to preserve the independence of the franchisee.

 Denmark, where it is critical to specify the independent contractor status of the franchisee. Malaysia, where it is important that the signage make clear the status of the franchisee. Switzerland, where there is a risk that the strict employment law could be applied by analogy to franchising. And the United Kingdom, where recent case law suggests an employment relationship could exist even in a franchising context.

In short, U.S. franchisors would be well advised not only to seek counsel but to treat their agreements and their relationships with the same care beyond U.S. boundaries as they do at home. In this as in so many other contexts, it really is a flat world after all. 

Philip F. Zeidman is a senior partner in the Washington, D.C., office of DLA Piper. He can be reached at Philip.Zeidman@dlapiper.com.

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