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Troubles continue to surface for the leading burger chain, McDonald’s Corp. (MCD - Analyst Report). A recent ruling by the National Labor Relations Board (NLRB) declared that McDonald's, USA, LLC will be treated as a joint employer together with its franchised restaurants. In other words, McDonald’s could be held responsible for any labor or wage violations by its franchisees.

The ruling comes in the wake of complaints made by workers against this fast food chain over the last 20 months accusing it and its franchisees of unfair labor practices, which include illegal dismissals and threatening or penalizing workers for their pro-labor activities.

The workers have claimed that the company is a joint employer as it strictly instructs its franchisees to follow all rules related to food, cleanliness and employment practices. Given the scenario, the labor board ruled that McDonald’s would be considered as a joint employer if both parties do not arrive at a settlement.

However, McDonald’s, 90% of whose restaurants in the United States are franchised, stated that it would fight against the decision. It indicated that it does not determine decisions on hiring, wages or other employment matters at its franchised restaurants.

Consequences

The company is already under pressure to increase wages. In May this year, its workers protested at the headquarters to push wages to $15.00 per hour. (Read more:  Fast Food Workers on Strike Globally). Such a ruling is a shot in the arm for workers, providing them a more centralized and powerful authority and making it easier for them to unionize and present their demands.

McDonald’s would now be seen as a corporation and an employer of thousands of store employees across the country. It will be liable to face the consequences of violating employee rights.

Who Else?

Franchising is a trend among fast food chains now. Franchising reduces ownership of restaurants and thereby lowers the responsibility of these food chains. Moreover, focusing more on re-franchising minimizes the company’s capital requirements and facilitates earnings per share growth and ROE expansion.

Besides, McDonald’s there are many other companies that face the same troubles as they also franchise a majority of their restaurants. Burger King Worldwide, Inc. (BKW - Analyst Report), Domino's Pizza, Inc. (DPZ - Analyst Report) and Yum! Brands, Inc. (YUM - Analyst Report) have more than 90% of their restaurants franchised; The Wendy's Company (WEN - Analyst Report) has more than 80% franchised units while Buffalo Wild Wings Inc. (BWLD - Analyst Report) has more than 55% franchised outlets.

Recent Issues Faced by the Company

Recently, a Russian consumer protection agency filed a lawsuit against the company in Moscow court stating that the company is selling food that contains more fat and carbohydrates than the permissible standards in Russia. Prior to that Shanghai Husi Food Co., a supplier of meat for McDonald’s, was found reusing meat that had fallen on the factory floor as well as mixing fresh and expired meat.

Bottom-Line

Though the legal process is long, the labor groups have already begun celebrating. On the restaurants’ front, however, entering into a franchise deal will be a bit challenging. Over the past few years, franchise job growth and new business formation have outperformed non-franchise growth. The ruling, if upheld, could halt the pace of growth.

We believe that the latest setback could adversely impact McDonald’s sales. McDonald’s presently has Zacks Rank #4 (Sell).

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