Recent McDonald’s Ruling Could Upend U.S. Franchising System

The decision allows McDonald’s’ corporate operations to be held responsible along with its thousands of independently-owned franchisees when it comes to dealing with disputes over franchisees’ treatment of workers for participating in protests calling for higher wages. It’s a major victory for a union movement that has been battered lately, but which has found a stalwart ally in the Obama administration.

With this ruling, the Obama administration may have begun an overturning of one of the pillars of the powerful and lucrative American franchise model, in which brands have expanded much more robustly than they could otherwise by attracting investments from independent business owners. These investors take on the ownership risks of running franchises and then pay the brands a portion of their proceeds for benefits such as marketing, common IT systems and so on.

Representatives of both McDonald’s and other companies were up in arms at the news. “There is no legal or factual basis for such a finding, and we will vigorously argue our case” in appeals, the quick-serve restaurant chain wrote in a memo to franchisees.

McDonald’s also said in a statement that “this decision changes the rules for thousands of small businesses, and goes against decades of established law regarding the franchise model in the U.S.”

The International Franchise Association agreed, maintaining that the decision would “upend years of federal and state legal precedent and threatens the sanctity of hundreds of thousands of contracts between franchisees and franchisors.” The decision was “wrong and unjustified,” the association said.

The most immediate application could be to open the door further to unionization of fast-food workers because, in legal terms, it would be as if all of a chain’s workers ultimately were employed by the franchisee.

Understanding that vital point, the Service Employees International Union (SEIU) greeted the decision with glee. “HUGE victory for labor & fast food workers!” the union tweeted. SEIU has been instrumental over the last couple of years in fomenting protests around the country by fast-food workers seeking a boost in the minimum wage, even up to $15 an hour.

Of course, such advocacy also makes the union look better in the eyes of rank-and-file fast-food employees who might ultimately be voting on joining a union. And labor allies had a different view of the implications of the ruling for SME franchisees.

“McDonald’s can no longer get away with reaping all the benefits and the profits while saddling their franchises with all the risks and the costs,” Micah Wissinger, a New York labor attorney involved in some of the cases that have been filed against McDonald’s, told The Washington Post.


Dale Buss: Dale Buss is a long-time contributor to Chief Executive, Forbes, The Wall Street Journal and other business publications. He lives in Michigan.