Political spotlight falls on McDonald's - what does it mean for the UK franchise sector?

The recent BBC’s investigation into alleged working practices at McDonald’s attracted substantial political interest, no doubt due the brand’s recognition and the fact that it is one of the largest private sector employers in the UK, with an average age of 20 years old across its workforce.

The allegations are very concerning, and will inevitably have a negative impact on the perception of McDonald’s - and possibly the wider perception of the franchising sector in the UK. After all, McDonald’s is synonymous with the franchise model - it was Ray Kroc who pioneered franchising in the 1960s, using it as the driving force behind McDonald’s emergence as a global brand. In more recent times in the UK, the brand has become a cornerstone member of the British Franchise Association, seen by many as a standard setter for good practice with a rigorous franchisee selection and training programme.

Understanding the franchise model - this is not a single employer issue

McDonald’s operates a well-established franchise network in the UK – of the 1,450 restaurants operating in the UK, over 85% are operated as franchised sites. This means that a franchise agreement is entered into with an independent company, which grants the franchisee company the rights to operate a branded restaurant at an approved location, using the trade marks and operating system. As a result, McDonald’s will not employ the staff working in a franchised site; these employees will be employed by the franchisee. Whilst the franchise agreement will contain obligations on the franchisee to comply with general requirements around employee recruitment and training, a franchise agreement will rarely (and should steer clear of) stipulate the terms of their employment.

However recent press coverage and commentary from politicians and other public figures has demonstrated that the court of public opinion does not always take account of the necessary legal separation between franchisees and franchisors. The allegations uncovered by the BBC investigation are not a single employer issue, but presumably apply to multiple franchisee employers and possibly also to corporately operated stores.

What actions are available for a franchisor?

Unfortunately, the action that the franchisor can take may be somewhat limited depending on what is included in the franchise agreement. The franchisor will not be able to dismiss workers found guilty of these allegations if they are employed by the franchisee as opposed to the franchisor itself. Instead, the franchisor will need to enforce its rights against the affected franchisees, which may put pressure on the franchisees to take action against any of its workers found guilty of the allegations.

In a well-drafted franchise agreement, we would expect to see a right for the franchisor to terminate the franchise agreement if the franchisee or any of its directors or officers behave in an immoral manner or other way that may damage the reputation of the franchisor’s business or the brand. In the alternative, it may provide for other remedies, such as retraining, liquidated damages, or the withdrawal of certain rights or benefits.

An investigation will be required into each of the claims to determine if fault lies with the franchisees, and then take appropriate action which may include the ultimate sanction of termination of the franchise agreement and a claim against the franchisee for damages suffered as a result of the franchisee’s breach. Of course, if the franchisor is implicated with its own employees, then this may somewhat limit its ability to take action against the franchisees and may even expose the franchisor to claims from other aggrieved franchisees who may feel their business is being tarnished by the actions of other franchisees or the franchisor itself.

In any event, termination is not an easy decision, when you are talking about a long-term contract governing a capital intensive franchise business. Get it wrong and the mess could get a lot worse. Calls from politicians to simply terminate the offending franchisees do not appear to appreciate this reality.

How can franchisors avoid similar issues?

The fact that these issues have arisen in a franchise network is a correlation and not a causality, as proven by the fact that some of the instances may have occurred in the brand’s own restaurants. It is not possible to operate a service led business, which relies on a large workforce, without these types of issues occurring, but the magnitude of the claims does suggest that there is a systemic issue to address. As a general point, franchisors should ensure they have robust training manuals and policies and sufficient levels of controls in their franchise agreements including obligations in respect of training for employees and also the ability for the franchisor to audit the business including observing and talking to employees.

However, it is important to note that when it comes to employment matters, franchisors need to tread carefully and not interfere with a franchisee’s employment processes, particularly when it comes to grievances and disciplinary issues. Requiring a franchisee to dismiss its employees or interfering with the terms of their employment could result in an employment claim being brought against the franchisee and the franchisor as “joint employers”. This is an ongoing, existential issue for franchise systems in the United States, and has spread to other jurisdictions such as Canada and Australia. Fortunately, this type of liability rarely applies in the UK, but with politicians watching this story closely, bad facts can lead to bad law, and the UK’s current self regulatory approach to franchising could be threatened if these types of issues are not engaged with in a proper manner.

A version of this article was first published by MCA on 27th July 2023.  To discuss any of the points in this article or franchising more generally, please contact Gordon.Drakes@fieldfisher.com or Kate.Williams@fieldfisher.com