A New “Fact Sheet” for Franchises at the NLRB
By Michael J. Lotitio and Missy Parry
On December 19, 2014, the General Counsel of the National Labor Relations Board filed thirteen complaints against McDonald’s USA, LLC and numerous McDonald’s franchisees. The General Counsel named the franchisor, McDonald’s USA, as a joint employer for alleged unfair labor practices of various local franchisees. The General Counsel’s decision is not limited to McDonald’s. Naming the franchisor and franchisees under “joint-employer” theory threatens the franchise industry as a whole.
According to the “McDonald’s Fact Sheet” issued by the National Labor Relations Board, between November 2012 and December 19, 2014, 291 unfair labor practice charges have been filed against McDonald’s USA LLC and McDonald’s franchisees. Workers Committees, supported by the Service Employees International Union as part of its corporate campaign to organize McDonald’s workers nationwide, filed most of the charges. Of the 291 cases, the General Counsel found that 86 cases merited complaints. Eleven additional cases were “resolved” and 71 cases remain under investigation. Given these numbers, the General Counsel apparently dismissed 123 cases so far, but the NLRB never announced the total number of dismissed charges.
The General Counsel issued thirteen complaints involving 78 charges. More complaints will issue on the remaining charges and on new charges that continue to be filed almost daily by Workers Committees. According to the NLRB’s website, since July 2014, the Workers Committees have filed over 80 additional charges against a host of other fast food franchises including Taco Bell, Subway, Wendy’s, Burger King, Panerra, Jack-in-the-Box, Kentucky Fried Chicken, Bojangles, Domino’s and Popeye’s.
To address the McDonald’s charges, the NLRB consolidated hearings in three regional locations in the Northeast, Midwest and West. The initial litigation will begin on March 30, 2015 in New York. Subsequent hearings will be held in Chicago and Los Angeles. The NLRB has not scheduled many of the complaints for hearings, perhaps because it hopes that additional hearings will be unnecessary if the joint employer issues are resolved during the initial litigation.
Joint employer liability under the National Labor Relations Act has been well settled law for over three decades. Businesses are joint employers only when they share direct and immediate control over the essential terms and conditions of employment including hiring, firing, discipline, supervision and direction. Lareco Transportation, 269 NLRB 324 (1984); TLI, Inc. 271 NLRB 798 (1984) enforced 772 F.2d 894 (3d Cir. 1985). Only those entities that are directly involved in an employee’s day-to-day working conditions will be held liable for any labor law violations.
The Board’s General Counsel, Richard Griffin, the former General Counsel for International Union of Operating Engineers and one of the controversial NLRB recess appointments later found unconstitutional by the U.S. Supreme Court, wants to move the joint employer analysis away from direct day-to-day control over employment conditions to operational control on a system-wide level. Mr. Griffin advocated this new approach in another case pending before the Board. On April 30, 2014, the NLRB invited amicus briefs on whether to adopt a new joint-employer standard in Browning-Ferris Industries of California, Inc. The issue in that case was whether Browning-Ferris was a joint employer with Leadpoint, a staffing services company, in a union representation election. In its Amicus brief, the General Counsel advocated adopting a new standard that makes an entity a joint employer “if it exercised direct or indirect control over working conditions, had the unexercised potential to control working conditions, or where ‘industrial realities’ otherwise made it essential to meaningful bargaining.” This broad standard implicates almost any affiliated entity.
In the Browning Ferris brief, the General Counsel embraced the theories of David Weil’s book, “The Fissured Workplace.” Mr. Weil, now the Department of Labor’s Wage and Hour Administrator, asserts that there has been a fundamental restructuring of employment in many parts of the economy. He contends that employers have moved away from direct employment of employees to use separate employers who pay low wages, offer limited to no health care, pension or other benefits and provide tenuous job security. Since employees no longer work directly for the brand name property where they work, Mr. Weil believes that laws focused on ensuring basic legal standards and protecting workers add to the fissure by focusing attention on the wrong parties. He asserts that government enforcement efforts should focus on the top level of these industrial structures, rather than work-place by work-place. He encourages agencies to map connecting businesses and conduct system-wide investigations to force lead companies to bear more costs of “shedding” employment.
The General Counsel devoted significant time to this theory and franchises in his Browning Ferris brief. He described franchising as a relationship where an employer, the franchisor, inserts an intermediary, the franchisee, between it and the workers and designates the intermediary as the workers’ sole employer. Because the franchisor dictates terms of franchise agreement, the franchisor can exert significant control over day-to-day operations of their franchisees. His theory asserts that some franchisors effectively control wages by controlling every variable in the business through tracking data on sales, inventory and labor costs, calculating the needs of the franchisees, setting and policing work schedules, tracking franchisee wage reviews, tracking how long it takes employees to fill customer orders, and accepting applications through the franchisor’s system. He asserts that current technological advances permit franchisors to exert significant control over franchisees through scheduling and labor management programs that go beyond the protection of the franchisor’s product or brand.
The General Counsel named McDonald’s USA as a joint employer in the complaints before the NLRB issued any decision in Browning-Ferris. The General Counsel cannot change the Board’s standard. The old joint employer standard continues to be the law until the five Board members make an official change. Current law, going back almost four decades, does not support joint employer liability of a franchisor for its franchisees labor relations policies.
The Board’s 1968 decision in The Southland Corporation clearly held there was no joint employment liability in the franchisor industry based on operational control. The General Counsel’s “McDonald’s Fact Sheet” states that McDonald’s USA was listed as a joint employer on the grounds that “through its franchise relationship and its use of tools, resources and technology, [McDonald’s] engages in sufficient control over its franchisees’ operations, beyond protection of the brand, to make it a putative joint employer with its franchisees…”The General Counsel claims also that the franchisor’s “nationwide response” to recent fast food protests further justifies its inclusion as a joint employer. The Board, with its Democratic majority, will probably adopt the General Counsel’s position in Browning-Ferris. However, the General’s Counsel’s decision to issue complaints based on predictions of the Board’s decision, rather than established long-standing case law, is unprecedented, even at the NLRB.
Nowhere in the 150 pages of the thirteen complaints does the General Counsel elaborate on McDonald’s USA’s alleged control over its franchisees. The 78 charges involve allegations of discriminatory discipline, reductions in hours, discharges, and other “coercive conduct” directed at employees in response to union organizing activity. Each allegation is specific to the franchisee’s location and involves alleged actions by local management. The complaints provide only a conclusory statement that the franchisor “possessed and/or exercised control over the labor relations policies or practices” of its franchisee’s employees, and “has been a joint employer” of the employees. The General Counsel never explains the specifics of this joint employer theory. Given this lack of explanation, and the uncertainty about the Board’s current joint employer standard, the General Counsel makes it almost impossible for McDonald’s to defend against these unprecedented allegations.
The resolution of the NLRB’s legal standard could take years. After the initial hearing in front of an NLRB Administrative Law Judge in March 2015, the parties will file briefs and the ALJ will issue a proposed decision. That procedure will be repeated in the Los Angeles and Chicago cases. Those decisions may be appealed to the NLRB in Washington D.C. The Board’s decision is subject to appeal to federal district court where the unfair labor practice occurred, or in the District of Columbia. Ultimately, the case may be appealed to the U.S. Supreme Court.
During this time, franchises will face conflicting legal liability standards and potential destruction of a successful business model. In a recent opinion, the California Supreme Court rejected an attempt to hold franchisor Domino’s Pizza LLC liable in a sexual harassment case involving a franchisee. The opinion highlights the distinction between the operational and employment structure of the franchise model:
A franchisor, which can have thousands of stores located far apart, imposes comprehensive and meticulous standards for marketing its trademarked brand and operating its franchises in a uniform way. To this extent, the franchisor controls the enterprise. However, the franchisee retains autonomy as a manager and employer. It is the franchisee who implements the operational standards on a day-to-day basis, hires and fires store employees, and regulates workplace behavior. Analysis of the franchise relationship for vicarious liability purposes must accommodate these contemporary realities.
Patterson v. Domino’s Pizza LLC, 60 Cal.4th 474 (2014). The court held that imposition and enforcement of a uniform marketing and operational plan do not automatically make the franchisor liable for the franchisee’s employment practices.
This contractual arrangement benefits both franchisor and franchisee and gives many small business owners the chance to own part of the American dream. Absent the burden and risk of running individual outlets, franchisors can expand and create more jobs and business ownership opportunities. Individual franchise owners benefit from running a business with built-in brand recognition and goodwill while maintaining control over its workplace and employment decisions. The California Supreme Court recognized this division of labor and liability. The NLRB’s General Counsel completely ignores this distinction by focusing completely on operational control and standardization, which is required to maintain brand standards under the franchise model.
How will the new standard impact the franchise business?
First, both parties to the franchise relationship will need independent legal representation if they are accused of unlawful behavior, which increases costs. When joint employer status is established, both entities may be liable for the others unfair labor practices, including unlawful discipline or discharge of employees under the National Labor Relations Act. The General Counsel would also be handing unions a powerful new tool for organizing and bargaining in the franchise sector. A new joint employer standard may make it easier for unions to organize multiple franchisees of a single franchisor. A new joint employer rule may impose new bargaining obligations on franchisors and could also give unions the right to strike or picket at any franchisor location, not just the location where the dispute arises. The NLRB standard is likely to be adopted by other agencies like the EEOC, the Department of Labor and OSHA. Faced with liability for franchisees’ employment decisions, franchisors may be forced to take on greater operational control of their franchises, which will undermine the entire business model.
The new theory of joint-employer liability will have repercussions far beyond the franchise industry. Franchise business supply chains, dealer networks, and staffing companies are just some of the entities that will suffer the economic consequences from a new joint employer standard. The General Counsel’s new standard will compromise the stability and viability of many thriving business models.
What can franchises do?
First, take a look at your business. Review your current policies to maximize a finding of two “separate” businesses. Companies should be proactive regarding compliance with all labor and employment laws through handbook reviews and review of wage and hour practices. Next, look outside your organization. Get involved in the IFA, remain current on the law, and speak out through trade associations or franchise groups to help make the case against changing the joint employer standard at the NLRB and Congress.
Michael J. Lotitio is a Shareholder and Co-Chair of the Workplace Policy Institute in the San Francisco, CA and Washington D.C. offices of Littler Mendelson P.C. and Labor Counsel for the International Franchise Association. He practices all aspects of traditional labor relations, including matters arising under the National Labor Relations Act.
Missy Parry is Special Counsel in the Walnut Creek, CA office of Littler Mendelson P.C. and practices traditional labor law.