The McDonald’s fight that could change franchising

An ongoing fight between McDonald's and labor unions has entered a key phase this week, with parties squaring off over accusations of wage violations and unfair working conditions. The outcome of the case, which is being litigated before the National Labor Relations Board, could alter the franchise industry and what corporations are responsible for at individual chain locations.

The labor board is weighing whether McDonald's is defined as a joint employer with its individual franchisees. A ruling that McDonald's is a joint employer would mean the corporation could be held responsible for working conditions, pay and worker's rights violations at individual franchised locations.

Such a ruling would be the first such decision against a major franchisor. And for individual franchisees, a ruling in favor of joint employer status would mean they are no longer independent business owners and more beholden to corporate rules. Trade groups say such a ruling would upend the franchise business model.

The case stems from 19 consolidated complaints from workers, who claimed they were retaliated against for pro-labor activities. This happened in the wake of the 2012 fast food strikes organized by labor group Service Employees International Union. Workers nationwide protested big franchise restaurants, including McDonald's, Burger King and Wendy's, and pushed for a higher minimum wage of $15 an hour.

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Litigation will take place in a series of hearings before an NLRB administrative law judge in New York, Chicago and Los Angeles. A final decision by the NLRB's five board members may not come until 2016 or even later. An inevitable appeals process could go as high as to the Supreme Court, said Michael Lotito, co-chair of Littler's Workplace Policy Institute. They're part of the global employment law practice Littler Mendelson, which is closely watching the case.

"I am hearing of prospective franchises who are not buying licenses to operate due to the uncertainty," Lotito said. "Franchisors and franchisees are having issues trying to figure out how to renegotiate their franchise agreements as they assume separate employer status. If that changes, how does that impact the contract? No one really knows."

Scott Mlyn | CNBC

A McDonald's restaurant with a "now hiring" sign, in Sarasota, Fla.

The fast food giant says the NLRB general counsel's ruling from last year that it should be identified a joint employer is an unfair position that stems from the fast food strikes driven by unions.

"These Unfair Labor Practice allegations are driven in large part by a union-financed campaign, now more than several years old, which has targeted the McDonald's brand and impacted McDonald's restaurants," a McDonald's spokeswoman said in an email message to CNBC.

"The board's mirroring of the union's position in this matter represents an overreach and contradicts decades of case law. McDonald's serves its 3,100 independent franchisees' interests by protecting and promoting the McDonald's brand and by providing access to optional resources that help them run successful businesses. This relationship does not establish a joint employer relationship under the law," she said in the email.

But the National Employment Law Project, a national advocacy group that works on behalf of low-wage workers, argues it is unlikely McDonald's will prevail.

"This shouldn't come as a surprise to McDonald's or its allies," said Catherine Ruckelshaus, general counsel at the law project. "There is strong evidence that McDonald's has the right to, and in fact does, exercise quite a bit of control over its franchisees."

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