Guest Post: What the NLRB's McDonald's Decision Got Wrong

Published August 5th, 2014 -  - 08.05.1412


David Sherwyn is a Professor of Law Cornell University’s School of Hotel Administration. He is also academic director of the Cornell Institute for Hospitality Labor and Employment Relations and a research fellow at the Center for Labor and Employment Law at New York University’s School of Law. This is a response to Professor Catherine Fisk’s post.

Last week, Professor Fisk, citing facts and analyzing law, made a number of thoughtful and interesting assertions concerning the decision by the NLRB General Counsel to declare McDonald’s a joint employer in a number of unfair labor practice cases filed by employees who work at restaurants owned by franchisees.  Specifically, Professor Fisk contends that McDonald’s exercises significant control over their franchisees and therefore the General Counsel’s decision to hold the corporation liable is both correct and a victory for employees.  In addition, Professor Fisk argues that McDonald’s uses this control to create less-than-ideal working conditions for employees who would, therefore, be better off if there were more of separation between the franchisee and franchisor.  Below, I respectfully contest some of these assertions and conclude that the neither the joint employer doctrine nor the lessening of franchisor control is in employees’ best interests.

The decision by the General Counsel to find McDonald’s a joint employer has sent shockwaves throughout the franchise industry and for good reason. The franchise model that has operated for more than 50 years in hospitality and other industries has a basic concept: the franchisee, not the franchisor, is responsible and liable for any legal violations, from negligence to wage-and-hour violations, to discrimination. To ensure that liability rests with the franchisee, the franchisor studies the law and makes sure that it does not exercise enough control to be considered a joint employer. In my role as a Professor of Law at Cornell University’s School of Hotel Administration, I come into contact with in-house lawyers from a number of major franchisors (not McDonald’s) whose entire job is making sure that their company does not cross the “control line.” Unlike Professor Fisk, I do not claim to have detailed knowledge as to how McDonald’s operates. However, her claims that:

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.

fly in the face of my experience and seem somewhat dubious. First, since large franchisors know the law and have top counsel making sure the company is in compliance, it seems difficult to believe that McDonald’s exercised more controlled than allowed by law. Thus, it seems much more logical that instead of McDonalds crossing the control line, the NLRB General Counsel seeks to move the line. Second, most franchisors charge a franchise-fee based on revenue, not profit, so there is no reason to make a profit demand. Third, franchise law is complex and terminating a franchise and giving it to someone else is not like changing your cell phone carrier, or even terminating a manager of a corporate store. The franchisor, who must not exercise too much control, must prove a violation and give the franchisee time to cure it, and then there are numerous other procedures before a franchisee loses its business. The substantial number of franchisee versus franchisor lawsuits more than proves this point. Moreover, taking a franchise away from a franchisee is a drastic step that instills fear in current and potential franchisees—franchisors do not engage in such extreme behavior the way Professor Fisk seemingly implies.

Those arguing in favor the NLRB General Counsel’s position seem to have contradictory arguments. For example, some argue that the so-called lead employer needs to be at the table because the franchisee is often a small business owner who cannot afford to pay high enough wages or comply with the numerous labor and employment laws. Inherent in this argument is that along with lack of resources, the franchisee is not “the brand,” and thus, has no incentive to be a good corporate citizen. Professor Fisk argues that the lead employer must be at the table or give up control, assuming, it seems, that franchisees would comply with all statutes and regulations and would love to increase compensation, but the evil franchisor won’t let them. So do we need the franchisor to bring up employment standards or do we need them to get out of the franchisees’ way? It seems the answer depends on what the desired outcome of the specific advocate is at the time. These arguments are made by employee advocates who want to help: (1) unions organize franchises by having the franchisor at the table; and/or (2) plaintiffs’ lawyers (slip and fall, discrimination, wage-and-hour) looking for a deep pocket to sue. Not that union organizing or employees getting legitimate damages are undesirable goals, but, it seems to me, that should not drive this debate. The debate should begin with: why do employers franchise, who are the franchisees, what are the downsides of the franchisee/franchisor relationship, and how we can fix it?

Franchisors use the franchise model to grow their business without having to invest their own capital. The old theory that franchising puts owners on the ground and thus eliminates managerial shirking is a bygone concept because now franchisees often own hundreds of stores. This fact counters the argument that only the lead employer or brand can pay living wages and comply with all labor and employment laws. Franchisees, although they are owners, may not, however, have as much brand equity as the franchisor and therefore may not manage their franchises as well as corporate-owned stores. (At least one study I know of concludes that, and anecdotally it does seem that fast-food restaurants at highway rest stops with almost all transient guests do not provide the same quality is those who rely on a local community). Can we fix the problem? Yes!

Franchisors cannot and will not be liable for the actions of their franchisees. If the NLRB moves the line and the courts follow, the franchisors will move their control back. Contrary to Professor Fisk, I doubt that the franchisees, with the franchisor out of the way, will now greatly improve wages and working conditions—especially the small franchisees. But there is, I contend, a solution.

Franchisors can have brand standards. A hotel franchisor can require, for example, a flat screen TV, a microwave, and refrigerator in each room. Why not allow a franchisor to have employment brand standards? The franchisor sets a minimum wage and a requirement that the franchise comply with all labor and employment laws. If there is a violation, the franchisee has 60 days to cure the problem, if not, then the franchisee loses its franchise. Such a standard would not bring the franchisor to the collective bargaining table, and would not allow plaintiffs’ lawyers to sue the franchisor for millions in wage-and-hour lawsuits, but would allow the franchise model, which allows entrepreneurs to own and grow small businesses, to continue and would improve the working lives of the millions of franchise employees—isn’t that the point?

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