But It Wasn’t Me! Can McDonald’s Be Held Liable for the Alleged Labor Violations of Its Franchisees?

But It Wasn’t Me! Can McDonald’s Be Held Liable for the Alleged Labor Violations of Its Franchisees?

Kimberly Boyd*

Nationwide protests over low wages and poor working conditions within the service industry commenced in November 2012 when hundreds of fast-food workers took to the streets of New York City in what workplace experts called “the largest series of job actions at fast-food restaurants ever.”  Steven Greenhouse, With Days of Protests, Fast-Food Workers Seek More, N.Y. Times (Nov. 29, 2012), http://www.nytimes.com/2012/11/30/nyregion/fast-food-workers-in-new-york-city-rally-for-higher-wages.html?_r=0.  That same month, the National Labor Relations Board (NLRB) Office of the General Counsel began receiving charges filed against McDonald’s and its franchisees for alleged violations of the National Labor Relations Act (NLRA).  NLRB Office of the General Counsel Authorizes Complaints Against McDonald’s Franchisees and Determines McDonald’s, USA, LLC is a Joint Employer, NLRB (July 29, 2014), https://www.nlrb.gov/news-outreach/news-story/nlrb-office-general-counsel-authorizes-complaints-against-mcdonalds.  By the end of 2014, the NLRB had amassed a trove of complaints accusing the franchisor and certain franchisees of unfair labor practices against employees “for engaging in activities aimed at improving their wages and working conditions, including participating in nationwide fast food worker protests about their terms and conditions of employment during the past two years.” NLRB Office of the General Counsel Issues Consolidated Complaints Against McDonald’s Franchisees and Their Franchisor McDonald’s, USA, LLC as Joint Employers, NLRB (Dec. 19, 2014),  https://www.nlrb.gov/news-outreach/news-story/nlrb-office-general-counsel-issues-consolidated-complaints-against.  The allegations of unlawful conduct against McDonald’s and franchisees include:

[D]iscriminatory discipline, reductions in hours, discharges, and other coercive conduct directed at employees in response to union and protected concerted activity, including threats, surveillance, interrogations, promises of benefit, and overbroad restrictions on communicating with union representatives or with other employees about unions and the employees’ terms and conditions of employment.

Id.

In what many industry insiders consider an extraordinary move, the NLRB General Counsel, by classifying McDonald’s as a joint employer, declared that the company could be held “jointly liable for any unfair labor practices committed by its franchisees.”  Jacob Gershman, McDonald’s Joint-Employer Dispute Heads to Trial, Wall Street J. (Mar 9, 2016, 6:26 PM), http://blogs.wsj.com/law/2016/03/09/mcdonalds-joint-employer-dispute-heads-to-trial/.  The implications for both business and labor are immense.  If the NLRB prevails, it could lead to an unprecedented paradigm shift in the franchisor-franchisee business model.  Peter Cappelli & Cesar Rosado Marzán, How the McDonald’s Franchise Labor Case Could Upend an Industry, Knowledge@Wharton (Mar. 14, 2016), http://knowledge.wharton.upenn.edu/article/cappelli-mcdonalds/.  Trade groups like the International Franchise Association argue that such a designation “undermines a long-established and good business model that gives store owners autonomy,” and the group fears that the joint employment standard will make franchisees “vulnerable” to organized labor campaigns.  Gershman, supra.  In addition to potentially having to bargain with unionized workers, the joint employment standard could make McDonald’s liable for its franchisees’ labor law violations.  Robert Iafolla & Daniel Wiessner, NLRB Judge Breaks Up McDonald’s Joint Employment Cases, Reuters Legal (Oct. 14, 2016), http://www.reuters.com/article/labor-mcdonalds-idUSL1N1CK0AA.

McDonald’s asserts that it is not a joint employer of its franchisees’ employees, and while it “sets expectations and provides advice for how franchisees can meet those expectations,” implementation of any policy suggestion is optional.  Alexia Elejalde-Ruiz, Why Should McDonald’s Be a Joint Employer? NLRB Starts to Provide Answers, Chi. Trib. (Mar. 10, 2016, 7:23 PM), http://www.chicagotribune.com/business/ct-mcdonalds-labor-case-0311-biz-20160310-story.html.  Franchisees operate roughly 90% of McDonald’s restaurants, “[which] the company has long maintained are independent owner-operators who set their own wages, hiring and firing policies while adhering to some standards to maintain the integrity of the brand.”  Id.

McDonald’s argues that it does not “have the authority to direct or co-determine the hiring, firing, wage rates, hours, or any other terms of employment of [its] franchisees’ employees – which, for decades, has been the well-established criteria governing the definition of a ‘joint employer.’”  Cappelli & Marzán, supra.  Under the company’s operating agreement with its franchisees, it “sets the rules on how their franchisees must operate the restaurants.”  Id.  McDonald’s mandates franchisees to offer specific training to its employees and “describes how each job is performed.”  Id.  The NLRB, on the other hand, contends that its “investigation found that McDonald’s, USA, LLC, through its franchise relationship and its use of tools, resources and technology, engages in sufficient control over its franchisees’ operations, beyond protection of the brand, to make it a putative joint employer with its franchisees, sharing liability for violations.”  Donald Krueger & Steven M. Swirsky, McDonald’s-Franchisee Joint Employer NLRB Hearing Begins, SEIU Expands Fight for Fifteen and Other Developments, Mgmt. Memo (Apr. 2, 2015),  http://www.managementmemo.com/2015/04/02/mcdonalds-franchisee-joint-employer-nlrb-hearing-begins-seiu-expands-fight-for-fifteen-and-other-developments/.

Historically, in order for a franchisor to be jointly responsible for the actions of a franchisee, “the parent company must have direct and immediate control over personnel matters like hiring and firing.”  Gershman, supra.  As the Third Circuit articulated in N.L.R.B. v. Browning-Ferris Industries of Pennsylvania, Inc., 691 F.2d 1117, 1123 (3d Cir. 1982), “the ‘joint employer’ concept recognizes that the business entities involved are in fact separate but that they share or co-determine those matters governing the essential terms and conditions of employment.”  In its 2015 Browning-Ferris Industries of California decision, the NLRB aimed to put the “joint-employer standard on a clearer and stronger analytical foundation,” by reaffirming the Third Circuit’s articulation in Browning-Ferris Industries of Pennsylvania:

Under this standard, the Board may find that two or more statutory employers are joint employers of the same statutory employees if they “share or codetermine those matters governing the essential terms and conditions of employment.”  In determining whether a putative joint employer meets this standard, the initial inquiry is whether there is a common-law employment relationship with the employees in question. If this common-law employment relationship exists, the inquiry then turns to whether the putative joint employer possesses sufficient control over employees’ essential terms and conditions of employment to permit meaningful collective bargaining.

Browning-Ferris Indus. of Cal., 362 N.L.R.B. 186, 2015 WL 5047768, at *2 (2015).

By restating the joint employer standard in Browning-Ferris, the NLRB aims to set the tone for how the administrative agency applies the concept of “joint employer” moving forward.  Cappelli & Marzán, supra.

It could take years for a final resolution to this case.  Id.  The administrative law judge in the proceedings, Judge Lauren Esposito, recently stayed pending cases in Chicago, Indianapolis, Los Angeles, and San Francisco until the claims involving New York and Philadelphia restaurants have been resolved.  Iafolla& Wiessner, supra.  Judge Esposito did this out of fear that it would take years for the record to close, “and a definitive agency ruling with respect to joint employer status will not be made until well into the next decade.”  Id.  If the NLRB is victorious and McDonald’s loses, analysts believe that the company will ultimately take its fight to the Supreme Court.  Cappelli & Marzán, supra.

*Kimberly Boyd is a second-year evening law student at the University of Baltimore School of Law, where she is a Royal Shannonhouse Scholar and staff editor for Law Review.  She is also the President of UB’s International Law Society.