“Do You Want Liability With That?” The NLRB McDonald’s Decision that could undermine the Franchise Business Model (Part II)

 

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Yesterday’s post discussed the decision of NLRB’s General Counsel to hold McDonald’s Corp. jointly responsible with its franchise owners for workers’ labor complaints. The decision, if allowed to stand, could shake up the decades-old fast-food franchise system, but it does not stop there. The joint employer doctrine can be applied not only to fast food franchises and franchise arrangements in other industries, but also to other employment arrangements, such as subcontracting or outsourcing.

This decision could also impact the pricing of goods and services, as franchisors would likely need to up costs to offset the new potential liability. Everything from taxes to Affordable Care Act requirements could be affected if the decision stands.

If you are a franchisor and are currently in what could be determined to be a joint employer relationship, consider taking steps to further separate and distinguish your role from that of your franchisee. While franchisors should always take reasonable measures to ensure that franchisees are in compliance with applicable federal and state employment laws, they should take care to not wield such force over them to give the appearance of a joint-employer relationship.

We will be following the NLRB decision and keep you updated as the issue progresses.

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“Do You Want Liability With That?” The NLRB McDonald’s Decision that could undermine the Franchise Business Model

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On July 29, 2014 the National Labor Relations Board (“NLRB”) General Counsel authorized NLRB Regional Directors to name McDonald’s Corp. as a joint employer in several complaints regarding worker rights at franchise-owned restaurants. Joint employer liability means that the non-employer (McDonald’s Corp.) can be held responsible for labor violations to the same extent as the worker’s “W-2” employer.

In the U.S., the overwhelming majority of the 14,000 McDonald’s restaurants are owned and operated by franchisees (as is the case with most other fast-food chains). The franchise model is predicated on the assumption that the franchisee is an independent contractor – not an employee of the franchisor. Generally, the franchisor owns a system for operating a business and agrees to license a bundle of intellectual property to the franchisee so long as on the franchisee adheres to prescribed operating standards and pays franchise fees. Franchisees have the freedom to make personnel decisions and control their operating costs.

Many third parties and pro-union advocates have long sought to hold franchisors responsible for the acts or omissions of franchisees – arguing that franchisors maintain strict control on day-to-day operations and regulate almost all aspects of a franchisee’s operations, from employee training to store design. Their argument is that the franchise model allows the corporations to control the parts of the business it cares about at its franchises, while escaping liability for labor and wage violations.

The NLRB has investigated 181 cases of unlawful labor practices at McDonald’s franchise restaurants since 2012. The NLRB has found sufficient merit in at least 43 cases. Heather Smedstad, senior vice president of human resources for McDonald’s USA, called the NLRB’s decision a “radical departure” and something that “should be a concern to businessmen and women across the country.” Indeed it is, but it is important to note that General Counsel’s decision is not the same as a binding NLRB ruling and that it will be a long time before this issue is resolved, as McDonald’s Corp. will no doubt appeal any rulings.

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“Do You Want Liability With That?” The NLRB McDonald’s Decision that could undermine the Franchise Business Model

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On July 29, 2014 the National Labor Relations Board (“NLRB”) General Counsel authorized NLRB Regional Directors to name McDonald’s Corp.as a joint employer in several complaints regarding worker rights at franchise-owned restaurants. Joint employer liability means that the non-employer (McDonald’s Corp.) can be held responsible for labor violations to the same extent as the worker’s “W-2” employer.

In the U.S., the overwhelming majority of the 14,000 McDonald’s restaurants are owned and operated by franchisees (as is the case with most other fast-food chains). The franchise model is predicated on the assumption that the franchisee is an independent contractor – not an employee of the franchisor. Generally, the franchisor owns a system for operating a business and agrees to license a bundle of intellectual property to the franchisee so long as on the franchisee adheres to prescribed operating standards and pays franchise fees. Franchisees have the freedom to make personnel decisions and control their operating costs.

Many third parties and pro-union advocates have long sought to hold franchisors responsible for the acts or omissions of franchisees – arguing that franchisors maintain strict control on day-to-day operations and regulate almost all aspects of a franchisee’s operations, from employee training to store design. Their argument is that the franchise model allows the corporations to control the parts of the business it cares about at its franchises, while escaping liability for labor and wage violations.

The NLRB has investigated 181 cases of unlawful labor practices at McDonald’s franchise restaurants since 2012. The NLRB has found sufficient merit in at least 43 cases. Heather Smedstad, senior vice president of human resources for McDonald’s USA, called the NLRB’s decision a “radical departure” and something that “should be a concern to businessmen and women across the country.” Indeed it is, but it is important to note that General Counsel’s decision is not the same as a binding NLRB ruling and that it will be a long time before this issue is resolved, as McDonald’s Corp. will no doubt appeal any rulings.

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NLRB General Counsel Authorizes Complaints Asserting Franchisor Can Be Jointly Liable With Its Franchisees

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Earlier this week, the General Counsel of the National Labor Relations Board (NLRB), Richard F. Griffin, authorized the issuance of multiple complaints which include allegations that a franchisor, McDonald’s, USA, LLC, could be liable as ajoint employer with its franchisees for violations of theNational Labor Relations Act (NLRA). The text of the General Counsel’s authorization is available here.

Since 2012, McDonald’s, USA, LLC and its franchisees have been named in 181 unfair labor practice charges filed with the NLRB. In a memorandum issued to the Regional Directors, the General Counsel noted that 43 of those charges were found to have merit, while the remaining charges either were found to have no merit or are pending further investigation. The General Counsel’s action authorizes the regions in which the charges were filed to issue administrative complaints naming McDonald’s USA, LLC and its franchisees as respondents if the parties are unable to reach settlement in the 43 cases that have been found to have merit.

The authorization comes on the heels of an amicus brief filed by the General Counsel in June in Browning-Ferris Industries of California, Inc., urging the Board to adopt a new standard for determining joint-employer status. Under the current standard, the NLRB analyzes whether alleged joint employers share the ability to control or co-determine the essential terms and conditions of employment. TLI, Inc., 271 NLRB 798 (1984). Essential terms and conditions of employment include hiring, firing, discipline, supervision and direction of employees. Laerco Transportation, 269 NLRB 324 (1984). The putative joint employers’ control over these employment matters must be direct and immediate.

In the amicus brief, the General Counsel argued that the Board’s current standard for determining joint-employer status is significantly narrower than the traditional standard and ignores Congress’s intent that the term “employer” be construed broadly. Griffin urged the Board to adopt a new standard that accounts for the totality of the circumstances, including how putative joint employers structure their commercial dealings. Under the proposed test, joint-employer status would exist if one of the entities wields sufficient influence over the working conditions of the other entity’s employees such that meaningful bargaining could not occur in its absence.

The NLRB has not yet decided whether to adopt the General Counsel’s proposed standard, and the Browning-Ferris case is currently pending before the Board.

Implications and Recommendations

Although the General Counsel’s action has sparked a flurry of debate over the proper test for determining joint-employer status, it remains unclear whether the NLRB will accept his position. If the NLRB decides to adopt a new joint-employer standard, it would likely expand the number of entities found to be joint employers and thus potentially liable for alleged unfair labor practices, and could have ramifications under other employment laws as well, including wage and hour and discrimination cases.

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Franchisors Beware: McDonald's Workers Sue for Alleged Wage and Hour Violations by Franchisees

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Seven class action lawsuits were recently filed against McDonald’s Corp. and several McDonald’s franchisees in California, Michigan and New York. The lawsuits are a direct result of the coordinated effort by plaintiffs’ attorneys and the Service Employees International Union to pressure fast-food restaurants to pay their employees at least $15.00 per hour. The lawsuits are also part of a new strategy from the plaintiffs’ bar to sue fast-food and pizza franchisors (i.e., the “deep pocket”) for the conduct of independently owned franchisees.

The Michigan and New York class actions were filed in federal court and primarily allege that McDonald’s Corp. and the franchisees violated federal law by shaving hours from employees’ time cards, requiring employees to work off the clock and failing to pay overtime for hours worked in excess of 40 in a workweek. The California class actions were filed in state court and allege a variety of state labor law violations, including minimum wage and overtime violations and missed meal and rest breaks.

The lawsuits allege that McDonald’s Corp. is not only culpable for the suits relating to its corporate-owned stores, but also for its franchisees because of McDonald’s Corp.’s alleged heavy hand in monitoring and guiding the franchisees’ timekeeping, scheduling and other policies. In particular, the Michigan lawsuits allege that McDonald’s Corp. is a “joint employer” and thus also liable because it provides financial tracking computer software to franchisees, which allegedly guides when individual store managers may permit employees to be clocked in or on the clock. The software purportedly sends alerts to the manager when labor costs exceed a certain level of sales. As a result, the plaintiffs allege that managers prevented employees from clocking in (even though the employees were working) until the restaurant experienced a certain level of sales.

Generally, when determining whether a “joint employer” relationship exists, courts examine the totality of the circumstances, focusing on the economic realities of the particular relationship. A joint employment relationship may exist where two companies are deemed to share control of the employee, or one company is controlled by another company. Courts have considered a variety of factors when making this determination, including the ability to hire or fire the employees, supervision of the employees’ schedules and working conditions, determination of wages and the maintenance of employment records.

These McDonald’s lawsuits will need to overcome some very high hurdles before they may be certified as class actions due to the individualized nature of the plaintiffs’ claims and circumstances in the various stores. For example, certification may be inappropriate on a multi-store basis if McDonald’s can show that individual store managers implemented their own procedures and practices for scheduling and timekeeping. Nevertheless, these cases are a good reminder for franchisors to review the policies, training materials, software, etc., that they share with franchisees to ensure that the materials are lawful and will not inevitably lead to employees working off the clock. Lastly, franchisors should review their relationships and interactions with franchisees to ensure that they are not exercising control in a manner that could support a joint employer relationship.

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Awuah v. Coverall: What If I Didn’t Know About The Mandatory Arbitration Provision In My Franchise Agreement?

The National Law Review recently featured an article by Matthew J. Kreutzer with Armstrong Teasdale titled, Awuah v. Coverall: What If I Didn’t Know About The Mandatory Arbitration Provision In My Franchise Agreement?:

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A new ruling by the United States Court of Appeals for the First Circuit in Awuah v. Coverall case, No. 12-1301, — F.3d — (1st Cir. Dec. 27, 2012), is yet the latest in a string of recent court decisions that confirm the strength and enforceability of arbitration clauses in franchise agreements.

The Awuah case first made waves two years ago when the United States District Court for the District of Massachusetts compared the franchise relationship between Coverall (a janitorial service franchisor) and its franchisees to a “modified Ponzi scheme.”  You can read more about that decision in my prior blog posts here and here.  This latest ruling deals with the enforceability of the arbitration clauses in a number of the subject franchise agreements.

The facts can be summarized as follows: a class of franchisees sued their franchisor, Coverall North America, which is a janitorial cleaning service. The franchisees assert several state-law claims against Coverall, including claims for breach of contract, misrepresentation, and deceptive and unfair business practices. In addition, the franchisees claim that Coverall misclassified them as independent contractors when they are, in fact, employees, and that Coverall failed to pay wages due to them.

Appellees, who are a subset of the overall class, challenge Coverall’s contention that appellees should be required to arbitrate the dispute based on arbitration clauses in the subject franchise agreements. Appellees became Coverall franchisees by signing Consent to Transfer Agreements, or Guaranties to Coverall Janitorial Franchise Agreements. These documents did not themselves contain arbitration clauses, but instead incorporated by reference the terms and provisions of the transferor’s franchise agreements, which did contain such clauses. None of the appellees allegedly received (or requested) copies of the franchise agreement signed by its respective transferor.

Appellees argued to the U.S. District Court for the District of Massachusetts that “it is black-letter law in the First Circuit that an individual may not be bound to an arbitration clause if he does not have notice of it,” citing cases brought under federal employment statutes. Appellees made the point that Coverall had not demonstrated that any of them were shown the transferor’s franchise agreement, or that they were shown the arbitration clause contained therein. The District Court agreed, determining that the appellees did not have to arbitrate their claims against Coverall because they did not have adequate notice of the arbitration clause in the franchise agreement. Coverall appealed.

The U.S. District Court for the First Circuit overturned the District Court’s ruling, finding that under governing Massachusetts law, “one who signs a written agreement is bound by its terms whether he reads and understands them or not.” The Court further found that Massachusetts does not impose any requirement that the parties be given special notice of an arbitration provision. In any event, the Court stated, any such requirement would be preempted by the Federal Arbitration Act, 9 U.S.C. § 1, et seq., which requires that agreements to arbitrate be treated in the same manner as other contracts.

This latest decision serves as a reminder for prospective franchisees to carefully review a proposed franchise agreement before signing.  For existing franchisees, it is a warning that mandatory arbitration clauses are not easily avoided.  For franchisors, the decision highlights the importance of ensuring that, when a franchisee transfer or assign their franchises, the new franchisees receive and sign a full copy of the franchise agreement that will be effective post-sale.

© Copyright 2013 Armstrong Teasdale LLP

How Many Calories is in that Burger? PPACA Makes Sure you know.

The National Law Review recently published an article by Molly Nicole Lewis of McBrayer, McGinnis, Leslie and Kirkland, PLLC regarding The Food Industry and The Patient Protection and Affordable Healthcare Act:

 

We all occasionally grab a quick bite on the go. With fall in full swing, and our schedules filling up, it is much more tempting to drive through and pick up dinner rather than slaving over the stove after a non-stop day. Consider this:  What if the menu was labeled with calorie information and you could see that the Hardee’s Thickburger you wanted to order contained 910 calories.  A healthy caloric intake for an average person is 2000 calories per day – that’s also stated on the menu.  The burger just became ½ of your daily allotment of calories. That information would definitely prompt anyone to reconsider their choices.

Menu labeling, as outlined in the Patient Protection and Affordable Health Care Act (PPACA), might actually change the way we eat, when we eat out!  That is exactly what the National Restaurant Association and the National Association of Convenience Stores is grappling with.  In the wake of the Supreme Court upholding the PPACA, it is not just the medical and insurance communities buzzing. The food industry is wadding through their own set of new rules regarding how they present their product and interact with consumers.

As outlined in Section 4205, nutritional menu labeling is required for chain restaurants across the country. The provisions include labeling requirements for restaurants and food vendors, with 20 or more outlets. Calories have to be posted on menus and menu boards, including drive-thru menus. Display tags with additional information, including fat, saturated fat, carbohydrates, sodium protein, and fiber must be available in writing, upon request. Vending machine companies that operate at least 20 machines are also subject to these requirements. For buffet-style or self-serve restaurants, a sign must be placed adjacent to each food and beverage item listing calories per item or serving.  There are some exceptions that will not require calorie disclosure. Items not listed on the menu such as condiments, daily specials or temporary offerings. If an item appears on the menu less than 60 days per calendar year, or a test market items appears on a menu for less than 90 days, they are both exempt.

The Food and Drug Administration (FDA) considered Section 4205 effective immediately. However, without detailed guidance from the FDA, these provisions cannot be required.  The final FDA regulations are expected by the end of 2012.  Industry implementation would become effective six months after publication, in early 2013.  If a restaurant that is not required to comply with Section 4205, voluntarily registers with the FDA and follows the federal disclosure guidelines, they are not subject to any state or local nutrition disclosure requirements.

There is more at stake here then complying with disclosure regulations. For owners and operators in the food industry there are real costs to be considered. The new menu requirements alone will demand printing new menus and menu boards. Nutritional analysis may have to be performed to accurately report the information to the consumer. All of these added expenses could mean thousands in unbudgeted expenditures, and will result in consumer behavioral changes where the full financial impact cannot be determined – until after the fact.

It is interesting to contemplate how each of us will react to menu labeling. Will it help change the health of our country? The jury’s still out, but we are eagerly anticipating the verdict.

© 2012 by McBrayer, McGinnis, Leslie & Kirkland, PLLC