Guest Post: What it Means that McDonald’s is Responsible for its Franchises

Catherine Fisk is the Chancellor’s Professor of Law at University of California, Irvine. She is the author of the award-winning book,Working Knowledge: Employee Innovation and the Rise of Corporate Intellectual Property, 1800-1930.”

The action of the General Counsel of the National Labor Relations Board in determining that unfair labor practice charges against McDonald’s can proceed is very important but nowhere near as revolutionary as critics of the decision suggest. The General Counsel determined in several of the scores of cases pending before it involving McDonald’s workers that McDonald’s exercises sufficient control over the working conditions at McDonald’s restaurants operated by franchisees that workers who were fired allegedly in retaliation for asserting their rights to higher pay and to unionize can assert claims against the McDonald’s corporation as well as against the company that owns the franchise.

In another case currently pending before the NLRB involving a Browning-Ferris Industries recycling plant in California, workers are asking the Board to determine that when the employees of a business unionize, both the temporary staffing agency that is their employer on paper and the business that receives and supervises their labor must bargain with the union when meaningful bargaining over labor conditions cannot occur without both there. At some point in the next several months, the Board may decide the Browning-Ferris case which will give some indication whether the action of the General Counsel in the McDonald’s case will be the Board’s official interpretation of the obligations of employers under the NLRA.

Unions and other employee activists trying to combat low wages have focused on the joint employer issue because they see it as essential to change working conditions. When a company outsources the hiring and supervision of the workforce to a labor contractor or to a franchisee but maintains control over the operation of the business, workers find that it is essential to involve the lead company (McDonald’s or Browning-Ferris) in the negotiation and enforcement of workplace rights. Without the lead employer at the bargaining table or responsible for unfair labor practices, employees and the labor contractor or franchisee cannot raise wages or improve working conditions. If a franchisee increases wages at McDonald’s, the franchisee will be unable to meet the exacting standards imposed by McDonald’s about the ratio of staff to customers on an hourly basis and the profit margin that McDonald’s demands of all its franchisees. McDonald’s will terminate the franchise and will find another person willing to operate the franchise on McDonald’s terms. Because McDonald’s controls minute details of the operation of its restaurants nationwide, it makes sense for the law to recognize that the corporation that actually controls the conditions and the pay be held jointly responsible for the low wages and lousy working conditions.

In the McDonald’s cases, the Service Employees International Union, which is assisting fast food workers to organize nationwide, filed unfair labor practice changes against both the McDonald’s corporation and numerous franchise operators of McDonald’s restaurants. The charges allege that when McDonald’s employees started conducting one-day strikes and other protests of their low wages and other working conditions in the fall of 2012, the franchisees who are their nominal employer and the McDonald’s Corporation both violated the National Labor Relations Act in retaliating against them for their protest.

An employer in section 2(2) of the NLRA is defined broadly and circularly: “The term ‘employer’ includes any person acting as an agent of an employer, directly or indirectly.” So, too, is the term employee: “The term ‘employee’ shall include any employee, and shall not be limited to the employees of a particular employer.” NLRA section 2(3). The statutory language makes clear that Congress intended the terms to be given a broad and functional definition.

Since the 1960s, the Supreme Court and the NLRB have recognized that a group of workers may have more than one employer and that where they do both employers must both bargain collectively with the workers over the terms and conditions of employment and both are responsible for the unfair labor practices committed in operating the workplace. Such “joint employment” often exists where an employer brings in a labor contractor to supply unskilled labor to work at the company to perform part of the company’s normal production process. This use of labor contractors, which has a long history in sweatshops in the garment trade, has become an increasingly common practice in janitorial and agricultural work, and also in manufacturing and service work.   And raising wages or improve working conditions – whether through unionization or through legislatures raising the minimum wage and counting on litigation or inspection to ensure the improved wages are paid – will require the lead employer as well as the labor contractor to be held legally responsible for labor violations.

The franchise model that McDonald’s uses is slightly different although the result is the same. McDonald’s (the franchisor) does not outsource just the hiring of labor, but instead outsources the operation of almost all of its restaurants. But the principle remains unchanged. McDonald’s does not simply license its trademarks and its trade secret recipes, but instead it specifies what prices franchisees can charge and how the workers are to operate the restaurant. In order to ensure that franchisees can sell burgers and fries at the prices McDonald’s sets, the corporation provides computer software to guide the franchisee in its staffing decisions to reduce labor costs and increase efficiency. A franchisee who believes employees should be paid more cannot make a profit under the McDonald’s formula if he raises wages and he will lose his franchise if he cannot make the payments required under the agreement. It does not matter that the franchisee is the entity that technically has the employees on its payroll if the franchisor exercises so much control over the operation of the business that the franchisee cannot really determine working conditions.

In Boire v. Greyhound Corporation, 376 U.S. 473 (1965), the Supreme Court considered whether Greyhound was a joint employer of porters, janitors, and maids, who worked in Greyhound’s bus terminals for a contractor. The Board had found that:

[W]hile [the contractor] hired, paid, disciplined, transferred, promoted and discharged the employees, Greyhound took part in setting up work schedules, in determining the number of employees required to meet those schedules, and in directing the work of the employees in question. The Board also found that [the contractors’] supervisors visited the terminals only irregularly—on occasion not appearing for as much as two days at a time—and that in at least one instance Greyhound had prompted the discharge of an employee whom it regarded as unsatisfactory.

Id. at 475.

The lower court rejected the Board’s rule, but the Supreme Court overturned the lower court. In remanding the case for a determination of the joint employer status of Greyhound, the Court rejected the notion that Greyhound could not be required to bargain jointly with its contractor if the contractor were found to be a viable independent business, saying:

[w]hether Greyhound, as the Board held, possessed sufficient control over the work of the employees to qualify as a joint employer with [the contractor] is a question which is unaffected by any possible determination as to [the contractor’s] status as an independent contractor. . .. And whether Greyhound possessed sufficient indicia of control to be an ‘employer’ is essentially a factual issue. . . .

Id. at 481. Thus, the “joint employer” concept recognizes that when separate business entities effectively share control over the essential terms and conditions of employment, they both are employers under the NLRA.

The effective control test that the workers urge the Board to adopt in the Browning-Ferris case and that the Board’s General Counsel appears to have adopted in the McDonald’s cases returns the Board to the rule that the Board followed decades ago. NLRB v. Browning-Ferris Industries 691 F.2d 1117, 1123 (3d. Cir. 1982).

One factor that is crucial in the right to control test is whether the lead employer (in the case of a fast food business, the McDonald’s corporation) has the contractual right effectively to control or to co-determine the working conditions of the workers who are hired by the franchisee. McDonald’s could respond to the General Counsels’ decision by relinquishing enough control over the operation of the restaurants that the franchisees can raise wages, eliminate the unpredictable and extremely short part-time work schedules, and do the other things that workers believe are necessary to make fast-food production a decent job. If McDonald’s allows franchisees enough autonomy to enable them to deal with their employees over wages, then McDonald’s will no longer be a joint employer.