Federal Labor Board Reverses Bad Decision that Made Corporations Responsible for Franchise Decisions

Union influence (and the pursuit of deep pockets) temporarily overruled economic literacy and common sense.


Tea / Dreamstime

Some good news from the National Labor Relations Board: They've reversed a ruling that could have held large chains responsible for the labor practices of its franchises.

Prior to 2015, big corporations (like McDonald's, in this case) would be held responsible as employers during labor disputes or for labor law violations involving franchised locations, but only to the extent that they exercised corporate control over the decisions. If an individual franchise operator was violating labor law on his or her own—by paying less than the local minimum wage, for example—he or she would be the one held accountable, not corporate HQ.

A 2015 decision altered these terms, holding McDonald's potentially responsible for labor complaints filed by employees at individual franchises. McDonald's insisted that it played no corporate role in the hiring and pay decisions that had prompted the complaints.

In a party-line vote yesterday, the board overturned that decision and restored the previous understanding of the relationship between corporations and franchises or contractors.

Overturning this decision doesn't mean that franchised businesses cannot be held accountable for labor violations. It merely means that the punishment for misconduct falls where the misconduct happens.

When the ruling was originally announced in 2015, I speculated that this change was being pushed partly because business franchises tend to operate on fairly thin profit margins and there was a limit to how much money could be wrung out of an individual restaurant or convenience store. A big corporation offered a bigger payday, even if that corporation wasn't responsible for these violations.

Some labor observers also suggested that this was meant to make it easier for unions to organize workers. Why go through the effort of all these piecemeal franchise fights when you can consolidate it all in one big go at the corporation? And again, much more could be demanded of McDonald's, the corporation, than some guy who owns five individual restaurants in Iowa.

I wondered in 2015 whether the decision could lead to greater automation of the fast food industry. McDonald's is indeed introducing more self-service kiosks in stores to serve customers, but I suspect the 2015 ruling probably played less of a role than recent hikes in the minimum wage.

Nevertheless, the 2015 ruling was a bad one—a blatantly political move that violated the logic of both economics and legal liability. Tossing it out was the right thing to do.