Why Employers Should be Concerned about the NLRB General Counsel’s McDonald’s Decision

09/04/2014 / Phyllis Karasov

Executive Summary: Impact of McDonald’s NLRB Decision
 
On July 29, 2014, the National Labor Relations Board General Counsel announced that he would authorize complaints against McDonald’s USA, LLC in over 40 unfair labor practice cases where the legal employers were McDonald’s franchisees. Many employers have incorrectly assumed that this development is relevant solely to franchisors and franchisees. However, the NLRB’s decision in this matter has potential to cause significant ripples in a number of industries. 

In the McDonald’s USA situation, the NLRB General Counsel determined that McDonald’s USA is a joint employer with its franchisees and therefore has liability for unfair labor practices allegedly committed by its franchisees. The general counsel is arguing that under a “totality of the circumstances” standard McDonald’s USA exercises sufficient control over its franchisees to make it liable for the franchisees’ unfair labor practices. This theory could also make temporary employee companies, staffing agencies, outsource and subcontract service companies and similar contingent staffing models joint employers with their clients. It is possible that companies which prescribe standards and requirements for their vendors, such as specified employment policies, mandated compliance with applicable local, state and federal law, promises to pay prevailing wage, required affirmative action plans and EEO policies, and similar requirements, could be determined to be joint employers with their vendors and suppliers.

This decision could have significant impact on a variety of business relationships and should be closely watched.



In-Depth Article: Why Employers Should be Concerned about the NLRB General Counsel’s McDonald’s Decision

On July 29, 2014, the National Labor Relations Board General Counsel announced that he would authorize complaints against McDonald’s USA, LLC, in over 40 unfair labor practice cases where the legal employers were McDonald’s franchisees. The decision to include the franchisor as a joint employer would change NLRB law which has existed for 30 years.

The test currently applied by the NLRB requires that to be a joint employer, a legally separate entity must exercise significant and direct control over the other entity’s employees and the other employees’ essential terms and conditions of employment.

Many employers reading of this development assumed that it had no impact on them, since they are not franchise operations. However, the decision to treat McDonald’s as a joint employer could be extended to other situations. For example, temporary employee companies, staffing agencies, outsource and subcontract service companies and similar contingent staffing models could be found to be joint employers with clients under reasoning similar to that which the general counsel wishes to apply to the McDonald’s cases.

The joint employer test presently used by the NLRB would be abandoned as proposed by the NLRB’s General Counsel. The general counsel is advocating shedding the current framework in favor of a “totality of the circumstances” approach, noting that technological advances permit franchisors to exert control from afar. For example, a franchisor can keep track of a franchisee’s sales data, labor costs, employee productivity, can monitor employee schedules, and even accept and screen employment applications through the franchisor website.

Under the general counsel’s proposed broader guidelines, a joint employer would be one that “exercise[s] direct or indirect control over significant terms and conditions of employment of another entity’s employees, where it possess[es] the unexercised potential to control such terms and conditions of employment, or where ‘industrial realities’ otherwise ma[k]e it an essential party to meaningful collective bargaining.” This new framework would be more closely aligned with other regulations under the FMLA, FLSA, Title VII of the EEOC, and the ADA.

FMLA Joint Employer Test
 
The FMLA joint employer test utilizes a “totality of the circumstances” test to find a joint employer relationship where “there is an arrangement between employers to share an employee’s services or to interchange employees; one employer acts directly or indirectly in the interest of the other employer in relation to the employee; or the employers share direct or indirect control of an employee because one employer controls, is controlled by, or is under common control with the other employer.” The FLSA employs the same test, finding that all joint employers may be both individually and jointly responsible for compliance with the Act if these factors are sufficiently met.

Title VII Joint Employer Test
 
Under Title VII, some courts allow complainants to include joint employers for the purpose of meeting the 15-employee minimum to invoke coverage under the Act. The complainant must prove that the employers exercise sufficient control over operations as to be considered co-employers. This less-formalized test has not been uniformly applied across jurisdictions, with at least one court recognizing the negative policy implications of allowing small businesses to be considered joint employers alongside larger entities for the purposes of Title VII liability.

ADA Joint Employer Test
 
The ADA also uses a “totality of the circumstances” approach that utilizes the following factors:  (1) the interrelation of operations, (2) common management, (3) centralized control of labor relations, and (4) common ownership or financial control existing among the several entities. If two entities are found to be joint employers, both will have a duty to provide reasonable accommodations.

In 2000, the EEOC provided the following guidance, using a temporary staffing agency to illustrate how each entity could be liable as a joint employer. A staffing firm placing a temporary worker would be liable under the ADA if it “fails to provide a necessary reasonable accommodation, absent ‎undue hardship, in connection with a pre-employment test that it ‎administers to an individual with a disability either directly or on a client's ‎behalf;‎ uses the results of a test that it administers directly or on a client's ‎behalf to exclude an individual with a disability, where the use of such ‎results is not job-related and consistent with business necessity; or knows or has reason to know that a client is administering or using ‎pre-employment tests in a manner that discriminates against staffing firm ‎workers with disabilities on the basis of disability and fails to take ‎corrective action within its control.‎” The client would likewise be liable under the ADA if it “fails to provide a necessary reasonable accommodation, absent ‎undue hardship, for an individual with a disability in connection with any ‎test administered by the client directly or by the staffing firm on the ‎client's behalf;‎ uses the results of any pre-employment test administered by it ‎directly, or by the staffing firm on its behalf, to exclude an individual on ‎the basis of disability, where the use of such results is not job-related ‎and consistent with business necessity; or knows or has reason to know that a staffing firm is administering or ‎using pre-employment tests in a manner that discriminates against ‎staffing firm workers with disabilities on the basis of disability and fails to ‎take corrective action within its control.‎”

Conclusion
 
If the NLRB follows the general counsel’s lead and finds McDonald’s USA, LLC to be a joint employer with its franchisees, the agency would be enacting a framework more closely aligned with its other regulatory agency counterparts. However, a “totality of the circumstances” approach here simply reinforces that each joint employer determination would be highly fact-specific.

It is difficult to predict how expansive the impact of this decision may be. For example, many companies prescribe standards and requirements for their vendors, which can include specified employment policies, compliance with applicable local, state and federal law, promises to pay prevailing wage, adopting affirmative action plans and EEO policies, and the like. Does customer control over vendors and suppliers through required policies and standards make the customer a joint employer with the vendor or supplier? The potential impact of the McDonald’s case could go far beyond the franchise situation.

Before the general counsel’s joint employer theory becomes law, an administrative law judge must agree to this test, and if the administrative law judge’s decision is appealed, the NLRB would have to affirm the administrative law judge’s decision. So it is uncertain how the McDonald’s cases will be ultimately decided.  If the NLRB’s decision is unfavorable to a franchisee, it can be appealed to a U.S. Court of Appeals.

Because of this increasing trend toward a broadly-defined joint employer status, businesses which do not want to be deemed a joint employer with another entity should begin to analyze and take actions to minimize how much control they exert over other entities, especially if they have any control over matters concerning payment methods or payroll practices; are involved in hiring, scheduling, or termination decisions; or participate in disciplinary matters related to an employee’s performance.