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Richard Griffin—How a Partisan Lawyer Can Get It So Very Wrong

By Michael Seid

The National Labor Relations Board (NLRB) is poised to overturn decades of settled law in its effort to rewrite contractual relationships between independent businesses, including between franchisors and franchisees. This new standard will have profound effects on small and large businesses across the country and a potentially devastating effect on franchisees and franchisors.The franchise model relies on the principle that franchisees are independent small businesses whose owners personally invest in the business, manage, hire, and fire their employees, and either make a profit or suffer a loss as a result of their endeavors. The franchisor does not invest in the franchisee’s business, does not supervise, direct, or control the day-to-day operations, and does not inspect the franchisee’s operation to ensure it comports with applicable laws. The franchisee and franchisor merely share a brand. The only control the franchisor exerts is through the contractual obligations it imposes to maintain brand standards and ensure some consistency in the delivery of branded services and products. This model has resulted in an economy-leading job creation rate and an increase in small business ownership due to its ability to harness individual entrepreneurial spirit and channel it with proven, branded products and delivery systems.

If the NLRB overturns precedent and adopts this new standard, franchising companies will not be incentivized to offer franchise opportunities, jobs creation in these industries will decline, and communities will suffer when existing franchised businesses close their doors. Further, under the Browning Ferris case,the economic effect of the NLRB’s decision could stretch beyond franchisees to any business that uses contracted labor. The beneficiary of the NLRB’s actions will be the labor unions who will then be able to recruit and organize the millions of workers employed by independent franchise owners and the trial bar.

Richard Griffin, Jr., the NLRB’s General Counsel has recommended that McDonald’s be considered a “joint employer” with its franchisees, and on December 19th, scheduled three consolidated hearings to be held in front of an administrative law judges starting on March 30, 2015. According to the announcement, Mr. Griffin alleges that McDonald’s and its franchisees jointly participated in actions including “discriminatory discipline, reduction in hours and other coercive conduct directed at employees in response to union and protected concerted activity including threats, surveillance, interrogation, promises of benefit and overbroad restrictions on communication with union representatives or with other employees about unions and the employees terms and conditions of employment.” He claims that McDonald’s, “engages in sufficient control over its franchisees’ operations, beyond protection of the brand” to make it a joint-employer with its franchisees and is therefore responsible for the labor law violations of those independent business owners.

Despite what he has publicly stated, the standard that Griffin is proposing does not return to the definition of joint-employment in place prior to 1984 and is unusual, as he has apparently taken the position that settled law, which is the position that the NLRB has adopted and upon which businesses have relied for decades in defining joint employment, should not only be ignored, but new, never employed standards instead be adopted.

Licensors are granted under Federal Law protection of their intellectual property (their brand) but commensurate with that protection are obligations that they must also protect that property. McDonald’s, according to Brandz in its Top 100 Most Valuable Global Brands 20141 is listed as the fifth most valuable brand in the world. For the NLRB to begin a process of defining what is required for any brand to protect its marks is certainly outside the scope of its regulatory authority as that rests with the Department of Commerce and not the Department of Labor and is not something an unelected administrative official in the NLRB is empowered to do.

The methods included in the McDonald’s contract with its franchisees, while routine and standard franchise agreement faire, are necessary and sufficient to serve McDonald’s’ federal brand protection obligations and purpose. In licensing its intellectual property to franchisees, McDonald’s is not involved in setting for its franchisees any human resource standards. Only the franchisee has the right to employ staff in their businesses and only the franchisee has the right to set their human resource policies or to make any employment related decisions.

The complaint further alleges that the NLRB “have been engaged in efforts to settle the matter with the parties.” Absent from the complaint is Mr. Griffin’s legal analysis on how McDonald’s, as the licensor, would even have the right to negotiate anything with the NLRB or its surrogates in labor unions related to the human resource practices of its franchisees, who are independent business owners. Those rights are contractual absent in franchise agreements and any negotiations that franchisors might choose to enter into would likely not be legally binding on any of its independent franchisees. As elsewhere, Mr. Griffin is seeking to impose on a licensor obligations that it has no contractual right to exercise as it relates to how its licensees operate their independent businesses on a day-to-day basis.

In his McDonald’s analysis, Mr. Griffin’s position rests primarily on the fact that McDonald’s provides a system that protects its intellectual property and included in that system is information it provides to its franchisees electronically. In a speech to law students at West Virginia University, Mr. Griffin lamented that there are “all kinds of ways that franchisors in real time can keep track of everything happening at the franchisee level.” The software in question includes recommended scheduling of staff based on transactions at franchisee’s restaurants and according to Griffin “goes beyond protection of the brand.“ While the information is robust and based on the actual transactions at the franchisee’s restaurant, there is seemingly little difference in this type of information being provided to franchisees than has historically been provided by all franchisors in their written operations manuals. The only appreciable difference is that the information is robust and is based on the actual business of the franchisee, which is made possible today due to the capabilities of modern IT systems, computers, and methods of communication.

Software is not a decision-making mechanism and is merely a tool to be used by the franchisee if it is helpful to better schedule and utilize its labor to improve unit profitability. Franchisees are free to disregard the information and make a different decision on staffing. However, according to Mr. Griffin, the mere providing of this type of beneficial information should be considered direct control by franchisors over the labor practices of its franchisees and sufficient to make them a “joint employer” of its franchisee’s employees.

What is most troubling in Mr. Griffin’s position is the purpose of providing this type of information to franchisees, whether in printed operations manuals or through electronic systems, is the same—it enables franchisees to make better independent business decisions in the management of their businesses. However, it does not change the fact that only the franchisee has the contractual right to make scheduling or other human resource decisions at their businesses.

Should the new Griffin standard that neither comports to current law or the standard employed by the NLRB prior to 1984, be accepted, the sole beneficiary of his redefinition of the franchise relationship and the de-construction of franchising will be the recruiting efforts of commercial unions like the SEIU. Perhaps this intended result is not surprising given Mr. Griffin’s public statements and employment history2 as the de-construction of franchising will make it easier for unions to organize and recruit franchisee’s employees.

The NLRB does not have the authority to unilaterally make the changes related to either how franchisors protect their brand or to impose obligations on the licensor and licensee to allow the franchisor to set human resource policies for the franchisee; that authority, if it exists would rest with Congress. In addition to the NLRB’s lack of power to unilaterally change the law, they apparently have not considered the economic damage to franchisors, franchisees, suppliers, consumers, and the economy as a whole. General Counsel Griffin has not identified any benefits other than those reaped by labor unions. Rarely has an administrative agency unilaterally decided that precedent, court decisions, federal statutes, and clearly enacted and settled law should be ignored and dismantled. When creating the NLRB, Congress did not contemplate the agency would have the power to seize and change core definitions as Mr. Griffin has done, including selectively imposing restrictions on how a company meets its obligations under the Lanham Act nor is there precedent for unelected officials taking such a unilateral action.

The FTC Rule and the Lanham Act creates the basis for franchise systems to achieve uniformity from one branded location to another and to evolve the system’s consumer offering. These brand standards are meant to protect the franchisor, franchisees and consumers but it is the licensee—the franchisee—who is responsible at the local level for meeting the system’s brand standards. The current legal standard in the United States is co-employment only exists if both companies control the hours and wages of employees and also determine the conditions of their employment. For example, in the franchise context, a franchisor could be considered a joint-employer with its franchisees if it is responsible for its franchisees’ human resource policies, which goes far beyond a franchisor’s traditional role of merely protecting the brand. According to General Counsel Griffin, the standard employed by the NLRB since 1984 was that the franchisor needed to have “Direct and immediate impact on substantial conditions of employment and it has to be actual—it can’t be potential” to be considered a joint-employer but he admits that even under the pre-1984 standard franchisors were not considered joint-employers with their franchisees.

Mr. Griffin understands the frailty of his position and acknowledges the NLRB would face significant legal obstacles in applying his new standard to the franchisor-franchisee relationship because “We have a problem legally for our theory”.

If adopted, the new Griffin standard would be a radical change in the definition of an independent licensing relationship and would ignore decades of precedent in the United States, including those employed by the NLRB prior to 1984. The resulting relationship would be akin to the forced creation of a joint venture/agency relationship. The standard would strip from both franchisors and franchisees their investment-backed expectations and would create significant ambiguities in the relationship. It also would change how the Lanham Act and its requirements that licensors (not just in franchising) police their brands for the benefit of consumers are interpreted. n

 

  1. https://www.millwardbrown.com/brandz/2014/Top100/Docs/2014_BrandZ_Top100_Chart.pdf
  2. Prior to serving as General Counsel to the NLRB, Mr. Griffin served as General Counsel for the International Union of Operating Employees (IUOE) and was also on the Board of Directors for the AFL-CIO Lawyers Coordinating Committee. A federal complaint was filed against Mr. Griffin personally in October of 2013, claiming that while he was the General Counsel of the IUOE, he and others participated in a “scheme to defraud [the local] out of revenue, cost savings and membership,” by means of kickbacks, bribery, violent threats and extortion.” [http://www.wsj.com/articles/SB10001424127887324081704578231960669011712] His appointment by President Obama as General Counsel to the NLRB surprised many on Capitol Hill due to the history of corruption within the IUOE as detailed in the federal complaint.

Michael Seid, CFE, is Managing Director at MSA Worldwide and CFWshops. He is a member of the 2015 IFA board of directors. Find him at mseid@msaworldwide.com or visit www.msaworldwide.com.

 

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