Employment Fissuring in Franchising: NLRB pursues McDonald's

by DLA Piper
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On July 29, the General Counsel (GC) of the National Labor Relations Board (NLRB) announced that, absent settlement, he has directed the issuance of complaints in 43 unfair labor practice (ULP) cases, alleging that McDonald’s franchisees and their franchisor, McDonald's USA LLC, were joint employers, jointly responsible for alleged unfair labor practices engaged in at franchisee restaurants. The NLRB GC’s decision is significant because it further illustrates that the franchise model – and its underpinning that franchisees are separate and independent businesses – is under attack on several fronts.

The National Labor Relations Act

The National Labor Relations Act (NLRA) is the federal labor law that provides nonsupervisory, private sector employees with the right to engage in or refrain from union and other protected concerted activities. An employer commits an ULP when it interferes with protected employees' NLRA rights. NLRA violations may be remedied with "make whole" remedies, including back pay, reinstatement, rescission of unlawfully issued discipline and the posting of a Notice to Employees in which the employer notifies its employees of their federal rights and commits to comply with federal labor law. Punitive damages and/or fines are not available under the statute.

The procedure likely to follow the NLRB GC's decision to issue the complaint is:

  • A trial before a NLRB administrative law judge (ALJ) will be scheduled
  • A NLRB lawyer will prosecute the case
  • The ALJ will issue a decision
  • The ALJ’s decision will be submitted to the NLRB for a final NLRB decision
  • Decisions of the NLRB may be appealed and/or enforced in a US Court of Appeals

The Joint Employer Standard

Pursuant to the NLRA, joint employers exist where two separate legal entities share the ability to control or co-determine essential terms and conditions of employment, such as hiring, firing, disciplining, supervising and directing employees. Where a joint employment relationship is found, both entities must comply with the various federal, state and local labor and employment laws with respect to the employees at issue and are liable as employers under these laws.

The NLRB applies the same test in the franchise context; however, it traditionally has been mindful of factors that distinguish the franchisor-franchisee relationship from the conventional employer-independent contractor relationship, such as the need of a franchisor to preserve the quality and good will of the franchisor’s brand and the franchisor's interest in eliminating unfair competition among its franchisees.

The Notice and Invitation to File Briefs in Browning-Ferris

Browning-Ferris Industries of California, Inc., et al. v. Sanitary Truck Drivers and Helpers Local 350, International Brotherhood of Teamsters arose out of a representation election in California where the Teamsters union sought to organize recycling facility sorters. The union argued that Browning-Ferris Industries of California Inc., doing business as BFI Newby Island Recyclery (BFI), was unlawfully attempting to avoid its obligation to recognize and bargain with the union because BFI was a joint employer with subcontractor FPR-II LLC, doing business as Leadpoint Business Services (Leadpoint), which directly employed the sorters. Applying the current joint employer test, the NLRB’s Regional Director rejected the union’s argument on the basis that Leadpoint was the sole employer.

The Teamsters appealed the decision to the full NLRB, arguing that BFI controls the sorters’ hours, wages and working conditions; determines the number of sorters working on each shift and their shift times; and sets their productivity standards for the sorters. The union further claimed that BFI's supervisors supervise the Leadpoint sorters and that BFI pays Leadpoint an hourly minimum-wage rate for each sorter. Union lawyers stated, “This case presents an opportunity for the board to address how best to evaluate joint-employer status in this increasingly common setting: workplaces where employers use labor contractors or staffing agencies to supply workers.” The union’s blog post announced that it would urge the NLRB “to overhaul its dated and toothless test of joint-employer status.”

Shortly thereafter, the NLRB issued a notice and invitation to file briefs regarding, among other things, whether the NLRB should adopt a new joint-employer test and, if so, what it should be. Notably, in its amicus brief, the GC supports the application of a new test to the franchise industry writing, “The ‘traditional standard’ cases finding that franchisors were not joint employers preceded the advent of new technology that has enabled some franchisors to exercise indirect control over employee working conditions beyond what is arguably necessary to protect the quality of the product/brand.”

The Impact of General Counsel’s Decision to Issue Complaint

The July 29 decision, coupled with the invitation for amicus briefs in Browning-Ferris Industries of California, Inc., suggests that the NLRB may well adopt a new “joint employer” standard that will impact the franchise and other industries. While the McDonald’s case is in its infancy, and the complaint allegations are not yet publicly available, once available, these allegations will provide insight as to the factors the NLRB finds indicate a joint employer relationship in the franchise industry and thus guide franchisors regarding the impact of the NLRB GC’s decision. As commenters have noted, the impact may be substantial and have profound implications on the franchise business model because the threat of a “joint employer” finding may eliminate the economic benefit of franchising, shift the costs of the new model onto consumers and/or result in fewer jobs in the industry.

Importantly, this decision is larger than the NLRB. It is part of organized labor’s desperate attempt to find relevance in today’s workplace by enlisting its allies – government agencies, NGOs, members of Congress, state attorneys general, the media and others –? to redefine the statutory definition of the term "employer" to force "top of the pyramid" employers to bear responsibility for employees of their contractors or in their supply chain. This is evident in organized labor’s innovative organizing tactics, the recent appointment of David Weil (who developed the theory of employment “fissuring”) as the Administrator of the US Department of Labor Wage and Hour Division, and recent lawsuits alleging that franchisors and certain franchisees are “joint employers.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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