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NLRB Ruling on McDonald’s Puts Franchising Stocks in Jeopardy

The National Labor Relations Board opened a big can of worms

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As if McDonald’s (MCD) wasn’t experiencing enough growth problems, a key government agency has made it even less compelling for the company to expand its footprint.

The National Labor Relations Board — an independent federal agency with the power to prevent and remedy unfair labor practices committed by private sector employers — has determined that the parent company can be held accountable for the labor practices of McDonald’s franchisees. The ruling effectively eliminates at least one of the key reasons the company would choose to franchise itself rather than own its own restaurants, which is to circumvent the inherent (and occasionally costly) headache of directly employing 1.7 million people scattered all across the globe.

McDonald's (MCD) franchising
Source: Flickr

Although the announcement from the NLRB was specific to McDonald’s, now that the precedent has materialized, it wouldn’t be a stretch to assume the government agency will feel the same about other organizations and industries that depend on the franchising business model. Specifically, the ruling raises the inherent risk of restaurant stocks, some hotel stocks, and even some retailing stocks.

What the National Labor Relations Board Said

Just for the sake of clarity, this is the bulk of Tuesday’s official statement from the National Labor Relations Board:

“The National Labor Relations Board Office of the General Counsel has investigated charges alleging McDonald’s franchisees and their franchisor, McDonald’s, USA, LLC, violated the rights of employees as a result of activities surrounding employee protests…The Office of the General Counsel has authorized complaints on alleged violations of the National Labor Relations Act.  If the parties cannot reach settlement in these cases, complaints will issue and McDonald’s, USA, LLC will be named as a joint employer respondent.”

The decision is in contradiction to long-established franchising relationships, most of which allow an independent contractor to use a brand name, purchase proprietary goods and supplies, and even benefit from corporate-level advertising, all in exchange for an upfront and/or annual franchise fee. At the core of the contractual relationship, however, was a franchisee’s acceptance of the business risk — one of the biggest of which was the inherent risk of hiring employees — in exchange for the bulk of any financial success a particular restaurant may generate.

The NLRB effectively destroys that employee-risk firewall, putting McDonald’s in the same hot-seat with franchisees, even though the corporation itself had and has no say in the hiring and employment of most of the chain’s workers. The argument in favor of such a decision is the notion that McDonald’s keeps such tight control over nearly every aspect of its franchisee’s business that it’s impossible to say the corporation isn’t culpable for how employees are treated or paid.

So, what does this mean for other franchise-heavy businesses?

Article printed from InvestorPlace Media,

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