UK: McDonald's "Joint Employer" Ruling In The US – A Threat To The Unique Franchisor/Franchisee Relationship?

Last Updated: 4 August 2014
Article by David Bond and Gordon Drakes

The National Labor Relations Board (NLRB) in the United States ruled on Tuesday that McDonald's could be held jointly liable for labour and wage violations by its franchise operators — a decision that, if upheld, could set a worrying precedent for many franchise brands in the restaurant and other service industries.

The ruling comes after the NLRB investigated 181 complaints that fast-food workers brought in the last 20 months, accusing McDonald's and its franchisees of illegally firing, threatening or otherwise penalizing workers.

The NLRB found merit in 43 of the 181 claims, and said it would include McDonald's as a joint employer, a classification that could hold the company responsible for actions taken at thousands of its restaurants - approximately 90 percent of McDonald's restaurants in the United States are franchise operations. The complaints included the assertion that McDonald's was a joint employer on the grounds that it orders its franchisees to strictly follow its rules on employment practices and that McDonald's often owns the real estate interest in franchisee owned restaurants. McDonald's intend to contest the ruling.

The ruling runs contrary to a recent case in the US involving the Subway brand (Doctors' Associates, Inc v Uninsured Employers' Fund) which found that the franchisor was not liable for its franchisee's employees' compensation payments (which the franchisee had failed to make). The International Franchise Association (IFA) considers that the misclassification of franchisees as employees is a real threat to the franchise business model and has been lobbying state legislatures to amend state laws to properly account for what the IFA refers to as "the unique relationship at the heart of franchising"

The UK Position

There has been no direct clarification in the UK regarding the extent to which a franchisor can be vicariously liable for the acts or omission of its franchisees, including being considered to be the employer of the franchisee and/or the franchisee's employees.  In broad terms, only an employer can be held liable for the acts or omissions of its employees and such a liability will not exist in an equivalent independent contracting relationship.

The courts in the UK have considered the nature of the relationship between franchisor and franchisee when addressing the enforceability of restrictive covenants. The common approach (following cases such as Office Overload v Gunn and Dyno-Rod v Reeve) is that the franchisor / franchisee relationship is more akin to that between a vendor and purchaser than an employer / employee and, for that reason, the courts have enforced restrictive covenants in franchise cases which would be far too onerous to be enforceable against an employee. However, this issue does depend on the facts of the individual case as was reinforced by the first instance decision in Fleet Mobile Tyres v Stone and Another in which the Judge said that there were certain aspects in which the parties' relationship was not so completely kept at arm's length as it would be in the case of vendor and purchaser.

Therefore the answer will depend on the nature of the relationship between the parties. The fundamental principle of franchising has always been that the parties to a franchise agreement are separate and distinct business entities. But this principle is complicated by the fact that:

(a) franchisees derive their corporate identity and working practices from intellectual property rights licensed to them by the franchisor;

(b) the relationship will often be governed by strict contractual terms and the requirements imposed on the franchisee by a detailed operating manual. These mechanisms give the franchisor a high level of control over the franchisee's business.

Although franchise agreements typically specify that the franchisee is to be regarded as an independent contractor, the court will look through that and examine the true nature of the relationship between the parties and the business realities. The court will particularly consider the level of control a franchisor has over a franchisee's business in determining whether the franchisee is, in reality, an employee.

Conclusion

The NLRB ruling would appear to be out of step with the generally accepted legal and academic understanding of franchising. Equally, rulings or judgments in the United States have no direct impact on the UK, although such judgments can be persuasive. Until further guidance is provided by the UK courts, franchisors can be at risk of claims from franchisees' employees or third parties.

 In order to minimise this risk, franchisors should:

(a) ensure that the franchise agreement and operating manual are drafted in such a way which consistently characterises the parties' relationship as that of independent franchisor and franchisee; and

(b) not exercise undue control over the day-to-day running of the franchisee's business. This could occur cumulatively, with control being extended over too many aspects of the business, or too intrusively, so that the legal independence of the franchisee is overwhelmed by him being regarded as at the "beck and call" of the franchisor.  Every situation will be different, as both the legal structures, as well as the means by which the franchisor interferes in the franchisee's business, vary radically from one business to the next.

It is easy to assume that because nothing has happened "it ain't broke, so don't fix it".  The reality is that some businesses may have allowed "control-creep" to build up over the years, and in different ways, and it is likely that in some networks there may be a serious "legal accident" waiting to happen.

What is clear is that situations where the franchisee is a sole trader or, if using a limited company, where the individual is in reality doing all the work, can be contrasted with larger, more 'corporate' franchisees where the risks are likely to be much reduced.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Gordon Drakes
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions