How the McDonald’s Franchise Labor Case Could Upend an Industry

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Peter Cappelli and Cesar Rosado Marzán on McDonald's and the NLRB

A court case between fast food giant McDonald’s and the National Labor Relations Board (NLRB) began last week in Manhattan amid predictions of sweeping consequences. The NLRB is backing employees of McDonald’s franchisees who want the fast food firm to be treated as a “joint employer” along with the franchise operator that hired them. If McDonald’s loses, it could face fundamental changes in its operating business model, the threat of unionization and collective bargaining across its more than 14,200 franchise outlets in the U.S., and increased vulnerability to all manner of litigation, according to experts.

In one stroke, all those consequences could extend to other businesses that use the franchising model, from hospitality to health services, analysts say. On the other hand, franchisees’ employees could get higher wages, perks, improved working conditions, more stable careers and a greater say in determining their rights.

The latest case has its origins in 2012 when fast food workers in New York City challenged McDonald’s in a strike, seeking better wages, improved working conditions and the right to unionize. Over the years, those clashes took on the banner “Fight for $15,” with support from the Service Employees International Union.

In July 2014, the NLRB said it found some merit in charges which alleged that McDonald’s and its franchisees violated employee rights, and that it will name the company and its franchisees as joint employers if they don’t reach a settlement with the affected employees. The NLRB reiterated that stance in December that year. An NLRB ruling in August 2015 in another case involving waste management firm Browning-Ferris Industries reinforced that position. McDonald’s claims it is wrong to treat it as a joint employer. Franchise owners, represented by the International Franchise Association, support McDonald’s, arguing that thousands of franchisee contracts and jobs are at stake.

No Easy Option

McDonald’s appears to be in a tight spot, with problems looming whichever direction it goes. “If McDonald’s is found to be liable for the labor law violations of its franchisees, then as a joint employer it could end up at the bargaining table,” said Cesar Rosado Marzán, a professor of law at Chicago-Kent College of Law. If, on the other hand, it doesn’t support the franchise operators, he agreed that it might end up earning the latter’s wrath.

“If McDonald’s is found to be liable for the labor law violations of its franchisees, then as a joint employer it could end up at the bargaining table.” –Cesar Rosado Marzán

“The bigger issue” has to do with employees as individuals suing or possible class-action suits over alleged pay discrimination, according to Peter Cappelli, Wharton management professor and director of the School’s Center for Human Resources. “There is a heck of an interest in taking a case against McDonald’s because so many people would be involved and the payoffs could be great.”

Rosado and Cappelli discussed the implications of the McDonald’s case on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Who is a Joint Employer?

“McDonald’s for sure [doesn’t] want to be pulled into this as a company,” said Cappelli. He noted that two types of franchises are in vogue. One is the “trade name franchise,” where the franchisee gets the rights to use the franchise owner’s brand name. The other is an “operating agreement,” which McDonald’s uses, where it sets the rules on how their franchisees must operate the restaurants.

“You are not an employee of McDonald’s, but you have these rules to follow,” said Cappelli. “The question is how close can you draw those rules without making these [people] employees.” McDonald’s does not want to be part of the employment of workers by local franchisees because then it ends up being liable for the decisions that are being made by the franchisees, he explained.

“As a franchisor — i.e., a company like McDonald’s — you would like to have as much control over your franchisees without being their employer because once you become their employer, you have all these obligations,” Cappelli continued. “The big issue is: In the operating agreements you can tell franchisees pretty much how to do everything.” He noted that, for example, McDonald’s requires its franchisees to provide specific training to their employees and describes how each job is performed, among other aspects.

“At what point do you [McDonald’s] start looking like an employer of these local [employees]?” asked Cappelli. “If you dictate everything, then in law you become a co-employer.”

McDonald’s has in the past explained why it should not be treated as a joint employer. “At McDonald’s, we do not have the authority to direct or co-determine the hiring, firing, wage rates, hours, or any other terms of employment of our franchisees’ employees – which, for decades, has been the well-established criteria governing the definition of a ‘joint employer,’” it had said in a statement after the Browning-Ferris decision, and reiterated that last week when the latest hearings began.

In the Browning-Ferris decision of August 2015, the NRLB said that “two or more entities are joint employers of a single workforce if (1) they are both employers within the meaning of the common law; and (2) they share or codetermine those matters governing the essential terms and conditions of employment.” It added that in evaluating whether an employer possesses sufficient control over employees to qualify as a joint employer, it will – among other factors – “consider whether an employer has exercised control over terms and conditions of employment indirectly through an intermediary, or whether it has reserved the authority to do so.”

Now, much depends on how the law is interpreted, according to Janice Bellace, Wharton professor of legal studies and business ethics. “The labor law statute has always provided for ‘joint employer’ status,” she said. “The question is how the administrative agency [the NLRB] and the courts [when they get the issue on appeal] have applied the concept. The NLRB in Browning-Ferris re-stated the test for determining joint employer status, and that would govern in the McDonald’s case.”

“There is a heck of an interest in taking a case against McDonald’s because so many people would be involved and the payoffs could be great.” –Peter Cappelli

Do franchise owners have a case in their argument that the joint-employer standard will expose them to higher costs and more litigation? “Collective bargaining is always about organized workers seeking better terms and conditions of employment, which may mean the employer … getting less profit, or passing the higher cost on to customers,” noted Bellace. “In light of the movement in the U.S. at the moment for a higher minimum wage in many cities — and even some states, like Oregon — I doubt that a tough stance on restraining wage increases for low paid workers will get a sympathetic reception from the general public.”

Who Benefits, and Who Doesn’t?

For franchisees’ employees, having McDonald’s declared as their joint employer could mean better pay and benefits. “It is a possibility that the work of franchisees’ employees gets upgraded and there is less turnover among them,” said Rosado. “Maybe some of these companies like McDonald’s [and] Walmart [will] look into their practices and maybe improve some things to quell the swelling of activism that we have seen against them.” Cappelli agreed that if franchisees’ employees are unionized, those jobs would become more attractive.

Incidentally, McDonald’s in April 2015 said it will increase hourly wages to more than $10 at all company-owned restaurants. That move covers 90,000 of its employees, but does not extend to employees of its franchises, as a Wall Street Journal report noted. McDonald’s franchises comprise 90% of its restaurants and employ an estimated 750,000 people, according to a Mother Jones report.

If the ruling goes against McDonald’s, the franchising operating model itself would be under threat, said Cappelli. “The idea of franchises is that the franchisor [like McDonald’s] has figured out how to run a store, rolled it out into a series of manuals,” he said. “[What] they are basically exporting when you buy a license to run a McDonald’s franchise, is all that knowledge about how to run [the restaurant]. Part of the knowledge is, frankly, how to employ low-wage unskilled people and get them to turn out this consistent, stable product. If you unionize them and raise the wages, a lot of the benefits of that operating model go way. If you had better paid people who were higher skilled, you would be wasting them with that operating model. So that is a big challenge for McDonald’s.”

Nationwide unionization of franchisee workers would become another of McDonald’s headaches. “If you are one of those [employees], you could sue McDonald’s, which has deep pockets, and not just your local franchise that doesn’t have deep pockets,” said Cappelli. “This matters so much because if you are trying to form a union, you don’t have to unionize at the local store. You could try to create a union of McDonald’s employees across the country.”

Further, if McDonald’s is declared as a joint employer, labor unions could target McDonald’s through strikes and boycotts and not be held liable under the Federal Regulation of Secondary Strikes and Boycotts (a trade union acting in support of a worker strike at another, separate enterprise), said Rosado.

“Collective bargaining is always about organized workers seeking better terms and conditions of employment, which may mean the employer … getting less profit, or passing the higher cost on to customers.” –Janice Bellace

Rosado noted that the Service Employees International Union has been backing minimum wage campaigns, especially those targeting McDonald’s. “They are interested in expanding the rules when it comes to joint employer,” he said. “It will have an impact on not just the restaurant industry, but also the hotel industry like a Hilton brand, and on all kinds of other brands that are run on the franchise model.”

Road Ahead for McDonald’s

A final decision could take years. The case is now being heard before an administrative law judge, after which it is expected to head to the full board of the NLRB, Rosado noted. If the decision goes against McDonald’s, the company would take it all the way to the Supreme Court, he said. “McDonald’s doesn’t … want to be labeled as a co-employer,” said Cappelli, noting that the case has been in litigation already for some years. “They’ve got big lawyers, and they’re going to run this thing down and appeal at every step of the way should they lose this. So this will go on for years.”

As the case takes its legal course, both Rosado and Cappelli expect that several trade associations will be supporting McDonald’s by submitting friend-of-the-court briefs. “If McDonald’s were to lose this … all the way to the Supreme Court, where they would take it if they have to, there are lot of dominoes lined up to fall,” said Cappelli.

McDonald’s seems to have other headwinds, too. “There seems to be a push [within the NRLB] to make large corporations more responsible,” said Rosado. “Given that trend, politically, this board may find McDonald’s to be a joint employer.”

Cappelli noted that the current situation in the Supreme Court could prove to be another issue for McDonald’s. “With the death of Justice [Antonin] Scalia [in February 2016], the Supreme Court is not so clearly pro-business as it was when he was there,” he said. However, “my guess is that McDonald’s is still going to try to push it all the way up [to the Supreme Court], because there is not a lot of compromising on their side that they feel they can do.”

According to Cappelli, the McDonald’s case also draws attention to the ways in which many businesses try to escape their obligations under employment laws, and it has political overtones as well. “Over the last generation, there have been lots of efforts by employers and businesses to get out from under the requirements of employment law,” he said. They achieve that by hiring contractors or by leasing employees from temporary staffing agencies, he explained. “This is one of many battles going on – it is also a Left-Right battle, and a Democrat-Republican battle.”

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