McDonald's Lawsuit Tests Franchise Business Model

Targeting FranchiseTen former McDonald’s workers filed a lawsuit this week that could have a significant impact on how national restaurant chains manage franchise owners.  The civil lawsuit against a McDonald’s franchise in Virginia alleges the store owner engaged in racially discriminatory hiring and promotion practices, but has made national attention by including McDonald’s Corp. as a possible defendant.  Should the lawsuit succeed in its involvement of the franchise parent company, large retail and restaurant chains across America will need to restructure their franchise management procedures to avoid similar legal action.

McDonald’s Franchise Sued for Racial Discrimination

A Virginia McDonald’s franchisee ignited the fire by allegedly mistreating and firing Black and Hispanic employees in systematic racial discrimination.  According to the legal complaint, a franchise owned by Michael Simon promoted racial and sexual harassment by addressing minority employees in derogatory terms and by turning over employees in order to “get the ghetto out of the store” because it was “too dark” in the restaurant.  The plaintiffs argue they lost their jobs to increase the ratio of white employees to minority ones, and filed the Civil Rights lawsuit alleging a pattern of sustained discriminatory behavior.

McDonald’s Corp Included as Defendant in Civil Suit against Franchise

The plaintiffs recognize that the store in question is not owned or directly operated by McDonald’s Corp, but argue that the parent company, “Could have put policies in place to stop what the plaintiffs endured.”  Going further, Paul Smith, lead attorney for the plaintiffs, argued in a press conference that the plaintiffs, “believe that McDonald’s Corporation controlled nearly every aspect of the store’s operations,” and therefore shares and assumes legal responsibility for the allegedly discriminatory behavior of the Virginia franchise.  This argument asserts that franchisers, like McDonald’s, “predominately control” franchise behavior through manuals and regulations that involve the parent heavily in store operation.

McDonald’s, which has not responded to the lawsuit, issued a statement that the company will read through the complaint and reiterated the company’s policy on discrimination by saying, “McDonald’s has a long-standing history of embracing the diversity of employees, independent Franchisees, customers and suppliers, and discrimination is completely inconsistent with our values.  McDonald’s and our independent owner-operators share a commitment to the well-being and fair treatment of all people who work in McDonald’s restaurants.”

Although the fast food giant has not tipped its legal hand, it is likely the primary argument will be that the parent company is not responsible for management decisions of its franchises.  The long-standing franchiser / franchisee relationship allows the parent companies arms-length protection from liability because it is the individual store owners that set wages and manage all in-store operations.  While management must follow general guidelines set by McDonald’s Corp, discrimination in a particular store would likely go unnoticed by the franchiser which does not have a presence on site.

McDonald’s Lawsuit Builds on NLRB Ruling

The established franchiser / franchise paradigm was shaken in December by a National Labor Relations Board (NLRB) ruling that found McDonald’s was a “joint employer” that could be included in complaints of wage restriction and anti-union activities.  The December decision came after national labor unions attempted to include McDonald’s as an employer in 78 cases that claimed McDonald’s franchises intimidated or fired employees attempting to unionize.  According to the NLRB, McDonald’s, and other large franchise parent companies, can be included as a joint employer in suits alleging anti-union activities. 

Carrying the joint employer logic to the Virginia discrimination lawsuit is not a significant leap in legal logic: if McDonald’s can be considered a joint employer than it can share liability for discriminatory behavior.  The NLRB decision, which is a long way from final due to the planned appeals process and court involvement, would clearly benefit employees of franchise stores by giving them more control over labor negotiations and, in the Virginia case, a deeper pocket from which to collect financial damages, but there are serious questions about whether or not holding parent companies legally liable for franchise actions is valuable.

Implications of McDonald’s Civil Lawsuit

Should the NLRB position be applied to the present case, all franchise parent companies would assume legal liability for virtually any malfeasance of an individual store, be it wage related, discriminatory, or possibility even personal injury.  The result would unquestionably create a massive overall in the franchise model that would drastically reduce autonomy of franchise owners.  Parent companies looking to avoid legal liability may be forced to expend resources to exert direct control over franchise stores, and may even abandon the franchise model all-together out of fear of expensive litigation. 

There is little question that the allegations against the Virginia McDonald’s store, if proven, warrant just compensation paid to the victims, but the long term effect of including McDonald’s Corp as a defendant to the case is an impossible-to-ignore concern that will come into play as the litigation progresses.

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