2014 – First NLRB Shots Against the Franchise Model.
The National Labor Relations Board (NLRB) is considering revising its long-established joint employer test, a change which may threaten the current franchise model. The current legal standard, which has existed since 1984, is that only legally separate entities that exert a significant and direct degree of control over employees’ essential terms and conditions of employment are considered joint employers under the National Labor Relations Act. The “essential terms and conditions of employment” are those involving such matters as hiring, firing, discipline, supervision and direction of employment. See TLI, Inc., 271 NLRB 798 (1984); Laerco Transportation, 269 NLRB 324 (1984).
David Weil, the new Wage and Hour Division Administrator at the Department of Labor (DOL), was the principal investigator on a 2013 report for the DOL: Improving Workplace Conditions through Strategic Enforcement: Report to the Wage and Hour Division Strategic Enforcement. In this paper, Weil claims that the “fissuring” of the employment relationship contributes to wage and hour law noncompliance. The NLRB General Counsel has identified temporary service workers, outsourced and subcontracted services, and franchising as target areas for the expanded joint employer concept. Workers affiliated with the fast food workers’ movement started a separate legal action. Early in 2014, employees at McDonald’s franchises in New York, Michigan and California sued the franchisor over allegations of wage theft, claiming that McDonald’s headquarters exerts careful control over franchised locations through computer software which tracks hourly labor costs.
The NLRB actions began in early 2014 in the Browning-Ferris case. Browning-Ferris involves a Teamsters union’s appeal of a NLRB Regional Director’s determination that only independent staffing company employees are eligible to vote in a representation election at a recycling plant, and regular plant employees are not, because the staffing company is a sole employer. The NLRB General Counsel in his filings has advocated a return to the pre-1984 test in which an “entity was a joint employer where it exercised direct or indirect control over significant terms and conditions of employment of another entity’s employees, or where it possessed the unexercised potential to control such terms and conditions of employment, or where ‘industrial realities’ otherwise made it an essential party to meaningful collective bargaining.” The General Counsel asserts in his brief that companies may effectively control employment by controlling other aspects of employment including: tracking data on sales, inventory, and labor costs; calculating labor needs; setting and policing employee work schedules; tracking wage reviews; tracking time needed for employees to fill customer orders; acceptance of employment applications through company systems; reimbursement of wages; retention of right to approve employees; requiring the company and its employees to follow safety rules; and making recommendations during the collective bargaining process or retaining the right to provide such input.
This expanded test would create many new joint employment relationships on a local and national level, and would make unionization easier in many industries in which services are subcontracted, outsourced, or licensed to smaller specialty companies. No decision has been issued yet in Browning-Ferris.
On July 29, 2014, the General Counsel announced that his office intended to charge McDonald’s in up to 181 cases of alleged unfair labor practices committed by its franchisees relating to union organizing activities at McDonald’s franchised restaurants across the country.
This sent shockwaves across the franchise industry. McDonald’s promptly released a statement asserting that it would appeal. International Franchise Association (IFA) president Steve Caldeira told reporters that the NLRB had recently “opened a Pandora’s Box” of labor complaints against franchisors, and possible unionization, and that the IFA had every intention of fighting back. “Franchising is under serious attack by a group of un-elected Washington bureaucrats beholden to labor bosses,” he said during a conference call.
On December 19, 2014 the NLRB followed through on its threat and filed complaints charging multiple McDonald’s franchisees and McDonald’s USA LLC with unfair labor practices. The General Counsel’s office issued 13 complaints in all involving 78 charges in 13 regional offices. The complaints allege that McDonald’s and its franchisees took action against individuals for engaging in activities meant to improve their wages and working conditions over the past two years, including discriminatory discipline, reductions in hours, forbidding communication with union representatives, changing schedules, issuing written warnings, and threatening termination in response to employees’ efforts to engage in union organizing activities.
The NLRB asserts that McDonald’s sets various requirements for how food is prepared, how stores are operated, and how employees are managed. The NLRB claims that McDonald’s USA, LLC, through its franchise agreement with each of its franchisees,”possessed and/or exercised control over the labor relations policies” of the franchisees, and was therefore a joint employer of the franchisee’s employees. A “McDonald’s Fact Sheet” issued by the NLRB in announcing the filings explains: “Our 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 of our Act.” The NLRB points to McDonald’s comprehensive computer system, which tracks labor usage and costs, as one of the primary means of controlling the franchisee’s operations, including employment decisions. The NLRB further claims that McDonald’s interfered with, restrained, and coerced the franchisee employees in the exercise of their rights, and discriminated with regard to the hire or tenure or terms or conditions of employment of the employees, thereby discouraging membership in a labor organization.
McDonald’s spokesperson Lisa McComb said in an emailed statement “The National Labor Relations Board’s actions today improperly and dramatically strike at the heart of the franchise system — a system that creates economic opportunity, jobs and income for thousands of business owners and their employees across the country.” McDonald’s independent owner/operators have also said they’ll fight the unfair labor practice claims.
The Empire Strikes Back.
On Dec. 29, 2014, McDonald’s filed a motion in the NLRB action. In its motion, McDonald’s asserts that the conclusory allegations regarding its joint employer status provide insufficient notice of the basis for the alleged joint employer status and deprive McDonald’s of its fundamental right to due process. McDonald’s seeks an order requiring the Regional Director to specify with particularity the underlying factual basis for the joint employer allegations or strike the allegations from the complaint and dismiss McDonald’s. The first hearing on the NLRB’s complaints is set for March 30, 2015.
The U.S. Chamber of Commerce, the International Franchise Association, the National Restaurant Association, and the National Retail Federation criticized the action of the NLRB. These organizations warned that the move could result in the loss of thousands of jobs as companies hesitate to move forward in franchising. Labor unions have targeted franchise businesses, particularly fast food, for unionization, and this action by the General Counsel is seen by many as an opportunity for unions to overcome a number of obstacles to unionization. The franchise structure itself, which includes thousands of small businesses and with high turnover of entry level and part-time workers, has been difficult for unions to organize.
The next step in the NLRB action will be litigated before NLRB administrative law judges, a process set to begin on March 30. The outcome of those proceedings may be appealed to the five-member labor board, and then to a circuit court of appeals, which could take several years.
In the meantime franchisors and the IFA are asserting before Congress and in the press that the joint employer model should not apply to the franchisor-franchisee relationship, because franchisees independently run their businesses, and make all hiring, firing, managing, and other employment
decisions.
DORSEY DO’S AND DON’TS
Practical Advice to Reduce the Risk of Becoming Liable Vicariously or as an Employer
Franchisors who do not want to be caught up in these cases should review their franchise agreements, disclosure documents, marketing materials, customer materials and Web sites, forms and manuals, training, communications, IT systems, and unwritten practices with legal counsel to reduce unnecessary controls.
Generally franchisors are liable for what they control and not liable for what they don’t control (e.g. a franchisee employee forgetting to wash his hands). For example, McDonald’s lost a case regarding boiling hot coffee because it set the temperature. Jack in the Box lost e-coli cases because it set the temperature of cooking the meat.
What is relatively new is the number of risks of attack for excessive control. For example, IT systems and related practices and documents can create that risk, and did not exist until recently. Our clients rarely let us review manuals or IT systems, because of a concern about costs. But when we do, we often find problems.
A threshold determination should be made as to what areas to leave to franchisees and what areas the franchisor should control. Generally, franchisors should minimize control to reduce risk, and only control what is essential to the system. Employment issues are generally best left to franchisees. In some areas franchisors will want to provide some training, assistance and standards, but should still leave as much discretion as possible to the franchisees. Lawyers can help identify the areas with the greatest risk.
The next blog post will include more specific steps that a franchise system can take to reduce its risk of becoming liable as a result of exercising excess control.
