Professional Service Agreement

One Small Win for McDonald's, and One Giant Victory for Small Business Owners

January 09, 2020

The National Labor Relations Board (NLRB or the Board) has ordered an administrative law judge to approve a settlement previously reached between McDonald’s, its franchisees, and workers. It appears the NLRB has restored the old rule that a joint employer relationship only exists if two or more employers both had the power to: hire or fire an employee; supervise and control an employee's work schedules or conditions of employment; determine an employee's rate and method of payment; and maintain an employee's employment records. By ordering approval of the settlement, the NLRB effectively agreed with McDonald’s that it is not a joint employer and therefore should not be held liable for its franchisees' labor practices––a major win for McDonald’s, as well as companies throughout the nation who use the franchising model (and their franchisees).

Background:The relationship between a franchisor and franchisee is an ongoing, contractual business relationship governed by a franchise agreement. A franchise agreement allows for a corporation (franchisor) to sell the rights to an individual or other entity to open a single store with the franchisor’s brand name at a much lower cost. This model, bringing with it the opportunity for almost anyone to become a business owner, raises the perplexing legal question of joint employer status. If two businesses are found to be joint employers, they will also be found jointly liable for any violations of the law. But, how to determine joint employer status?

Although varying tests have been used historically, generally speaking, prior to 2015, a joint employer relationship existed if two or more employers both had the power to: hire or fire an employee; supervise and control an employee's work schedules or conditions of employment; determine an employee's rate and method of payment; and maintain an employee's employment records.

However, under theBrowning-Ferris Industries(BFI) standard, which was handed down by the Board in 2015, when it was controlled by appointees of President Obama, two or more employers would be considered joint employers if they shared or codetermined matters governing the essential terms and conditions of employment. The inquiry focused on whether the alleged joint employer had the potential to control aspects of the workplace, either directly or indirectly, regardless of whether the employer ever exercised that authority.BFI’s modification of the standard made it more likely that a franchisor would be deemed a joint employer and therefore equally liable for alleged violations.

Although later vacated on other grounds, the NLRB made its first attempt to restore things to the pre Obama-era standard in 2017 when it handed down theHy-Branddecision, overrulingBFI. The NLRB, with last week’s McDonald’s decision, has now successfully returned joint employer status to the pre-BFIstandard.

The Decision: This lawsuit dates back to 2015, when the Service Employees International Union brought charges in connection with 61 complaints of unfair labor practices at 31 McDonald's franchise restaurants. The complaints accused the franchisees of illegally retaliating against employees of the chain for advocating for a $15 an hour minimum wage, as part of the national “Fight For $15” labor movement.

The workers also named McDonald’s Corporation, the franchisor, as a joint employer, even though the corporation, based in Illinois, did not directly employ them. Under this theory, the workers sought to hold McDonalds itself liable for the franchisees’ alleged violations. Throughout the litigation, however, McDonald’s steadfastly maintained that it was not a joint employer. In fact, the parties’ settlement agreement, reached on the eve of trial after three years of litigation, included a provision that McDonald’s is not a joint employer. An administrative law judge rejected the settlement.

The NRLB panel overruled rejection of the proposed settlement, and instructed the judge to approve the settlement––therefore, accepting the parties’ adoption of McDonald’s assertion that it indeed is not a joint employer.

What it Means:Over 90 percent of McDonald’s restaurants are franchises––that is, small businesses owned by individuals and entities other than McDonald’s Corporation. Undoubtedly, it is a major victory for McDonald’s Corporation to be immunized against liability for alleged violations in 90 percent of the stores. Yet this decision is much more far-reaching.

Indeed, the list of businesses that operate on the franchise model is almost endless. People buy franchises because they want to be business owners and make their own decisions, within reasonable parameters such as products offered and other restrictions necessary for branding. While it may be nice to have the backing of a large corporation when money is at stake, if a franchise owner becomes liable for everything regarding employees, it is likely that it would seize control of everything else, as well. And if the corporation has control of everything, there is no point in franchising.

Thus, this decision, declaring that McDonald's is not a joint employer, is not only pro-big business, but pro-small business owners, allowing franchisee owners independence in how they run their franchised stores, and, therefore, allowing this franchise model to continue.

Employers’ Bottom Line:In the eyes of employers, the NLRB’s decision is certainly considered a step in the right direction with regard to joint employment. Unfortunately, what is seen as a step in the right direction by employers, is seen as a step in the wrong direction by labor advocates. Indeed, it is highly likely that the NLRB decision directing approval of the settlement will be appealed. Having said that, the joint employer standard reflected in last week’s McDonald’s decision may be gaining currency everywhere. To wit: just this week, the usually employee-friendly 9th Circuit denied a petition for panel rehearing of its October 1, 2019, 2-1 decision that McDonald’s did not exert enough control over employees at its Bay Area franchisees to be legally considered a joint employer.