On Friday, March 15th, chaos struck McDonald’s. A massive systems outage, dubbed the ‘McDonald’s outage,’ forced Australian stores to shutter, bringing the bustling Friday evening trade to a grinding halt. While the golden arches are now shining again, the fallout from this technical hiccup has no doubt left franchisees, workers, and McDonald’s itself reeling. But who’s on the hook for these losses? Could Aussie franchisees seek restitution from the big M? What about the workers who missed out on shifts—do they get compensation? And if a third party caused the outage, could they be left holding the (brown paper) bag? This article dives into the liability maze of the McDonald’s outage.
What was the McDonald’s Outage?
Before we consider liability, we need to better understand what happened with the McDonald’s outage.
The issues started around 4 p.m AEST yesterday, during a configuration change taking place in the US. Ultimately, a routing issue stopped all traffic across the McDonald’s network. This meant screens and point of sale systems did not work.
The fast food giant attributed the outage to a third-party technology provider and clarified that it wasn’t a cybersecurity problem.
It took around 12 hours to properly remedy the issue. This means Aussie franchisees had no or significantly reduced trade for an entire Friday night.
Who is liable for franchisee’s losses?
It is clear from published statements that McDonald’s HQ in the US is attributing blame for the McDonald’s outage to a third party. I assume that the third party is not based in Australia.
In Australia, there are just over 1000 McDonald’s restaurants, with over 80% operated by independent franchisees. Even modestly assuming the loss of revenue per restaurant was $5,000, the total losses would be a hefty $4,000,000, or the value of over half a million Happy Meals.
Liability for that sum will ultimately depend on:
- What is contained in the franchise agreements;
- Who entered into the relevant software agreement;
- The contractual relationship between McDonald’s Australia and McDonalds US; and
- Whether any party was negligent in connection with the McDonald’s outage.
I would bet my Big Mac that McDonald’s franchisees must use the software and IT providers nominated by the franchisor. No doubt their franchise agreements contain an express provision requiring that. What’s not clear is if franchisees enter into the relevant IT support/ software agreement with the provider directly (I consider this unlikely), or instead with McDonald’s or its related entity.
If the former, the relevant IT agreement may include a service level agreement.
A service level agreement (SLA) outlines the terms and conditions regarding the performance and availability of the software or IT services provided. It typically specifies metrics such as uptime percentage, response time for support inquiries, and resolution time for issues.
Given the duration of the outage, if there were any such service level agreements in place, it’s likely they have been breached and, accordingly, damages would be payable.
In the more likely scenario that McDonald’s Australia or its corporate associate enters into the relevant software agreement on behalf of the franchisees, a service level agreement may still very well exist. It’s also likely, however, that McDonald’s disclaims any liability for harm or damage caused by third-party software providers. Typically such clauses look something like this: “While we take reasonable steps to ensure the suitability and quality of the third-party software providers whom we engage, you agree and acknowledge we are not liable for any loss, harm, or damage caused by those third parties, and you hereby release us from any and all liability in connection with any loss you suffer as a result of or in connection with the relevant third party software”
Potential Negligence
Where blame is being attributed to a third party, it may be that investigations are underway as we speak to determine if that third party was negligent in carrying out the relevant configuration. Negligence, according to US law, is the failure to exercise reasonable care, resulting in harm or injury to another person or their property.
Ultimately, then, who will be liable for loss of revenue is largely unknown, and will depend on numerous factors. The precise terms of relevant contracts will need to be scrutinised, and whether the actions leading up to the outage constitute negligence at law will need to be examined. If well drafted disclaimers are in place, for example, the Australian franchisees may indeed have no legal recourse available from their franchisor.
What is the situation for employees?
With the POS system out of action, it’s safe to assume that some employee shifts were cancelled or shortened last night. Most McDonald’s employees are casual, as it’s famously part of their business model. However, if those employees had their shifts cancelled last minute or were sent home early due to the issues, they will likely still need to be paid. This is because the Fast Food Industry Award mandates that casual employees must be paid for a minimum of 3 hours.
Legally, an employer can technically cancel a casual employee’s shift right up until they commence work. However, in practice, especially with large organizations, there is often a provision in the employment contract that specifies a minimum notice period for shift cancellations. I assume that McDonald’s has such a clause in its template agreements. Therefore, most employees likely received payment for a minimum of 3 hours of work, even if they were not actually required for their shift.
For any permanent employees, for example managers, they would be paid their ordinary hours.
Can McDonald’s Australia sue the third-party software provider?
McDonald’s Australia may have grounds to sue the relevant software provider if it can be demonstrated that (a) the provider breached a contract entered into, as discussed above, including any SLA, or (b) the provider was negligent in carrying out the configuration. Importantly, it’s probable that any relevant contract falls under US jurisdiction, necessitating legal proceedings to be initiated there.
What should McDonald’s Australia do?
No doubt McDonald’s Australia will have some pretty robust discussions with its US HQ in the following days. More locally, I believe McDonald’s will adopt a cooperative approach to, essentially, share the losses with its franchisees. McDonald’s has a reputation in the franchising industry for working with its franchisees and providing excellent support. McDonald’s will have to acknowledge the significant impact the McDonald’s outage had on its franchisees’ revenue and may look to provide some financial support to help remedy that. Some potential solutions include a period of franchise fee relief or reduction. Where franchise fees are typically paid based on a percentage of gross revenue, the reduction in franchisee revenue also likely meant a reduction in franchise fees paid to McDonalds Australia. Any fee relief or reduction from the franchisor will need to consider the direct financial impact they have suffered, too.
During the Covid pandemic, I helped Australian franchisors navigate the unprecedented occurrence of having their franchisees suddenly forced to close. When determining the appropriate response with my franchisor clients, we considered a number of factors, including the statutory obligation of good faith, and the impact of force majeure clauses. Most importantly, however, we considered the importance of maintaining a good working relationship with franchisees and ensuring their continued operations. While a single night of software malfunction is unlikely to send many Macca’s into liquidation, franchisees could still be hurting. McDonald’s Australia should use this as an opportunity to show their franchisees just how supportive a franchisor they are.
Important: This is an opinion piece. It discusses legal liability in the context of typical provisions contained in franchise agreements. I have not examined McDonald’s specific franchise agreement for the purpose of preparing this article. I have also not spoken to any McDonald’s representatives. The discussion as to what McDonald’s should do is not legal advice and is my opinion only (though Maccas, if you’re reading this and need a great franchise lawyer, I’m here).