The National Labor Relations Board (“NLRB” or “Board”) has issued its long-anticipated  decision in Browning-Ferris Industries, 362 NLRB No. 186 (pdf), establishing a new test for determining joint-employer status under the National Labor Relations Act (“NLRA” or the “Act”).  Because this revised standard will resonate with businesses relying on contractors and staffing firms throughout the economy and across industry lines, employers should be wary of its potential impact upon relationships with service providers that are supportive of, or critical to, their enterprise.

By fashioning a new standard in Browning-Ferris, the Board springs open new questions of which legally distinct entities will bear responsibility in NLRB cases addressing union recognition and bargaining obligations, as well as for any unfair labor practices that may follow.  Given the Board’s lead in fashioning a new standard, described as based on common law principles, it is likely to be relevant as well to other agencies, such as the Equal Employment Opportunity Commission and Department of Labor.

The majority opinion in this 3-2 decision makes clear that its objectives are far reaching: to address “the diversity of work­place arrangements in today’s economy,” including the increase in “[t]he procurement of employees through staffing and subcontracting arrangements, or contingent employment,” and fulfill a “primary function and responsibility.”

A New Standard for a Different Economy

Under the new standard enunciated by the majority, “[t]he Board may find that two or more entities are joint employers of a single work force if they are both employers within the meaning of the common law, and if they share or codetermine those matters governing the essential terms and conditions of employment.” Browning-Ferris jettisons the long standing requirement that not only must a party have the means to influence such matters, but it must also have exercised that right in a meaningful way.  If the decision is upheld and followed, no longer will the Board need to find that an employer retains and exercises direct control over another employer’s employees to be liable as a joint employer of those employees.

In the decision and press release, the Board suggests that “the current economic landscape”, which includes some 2.87 million people employed by temporary agencies, warrants a “refined” standard for assessing joint-employer status. As the majority puts it: “If the current joint-employer standard is narrower than statutorily necessary, and if joint-employment arrangements are increasing, the risk is increased that the Board is failing what the Supreme Court has described as the Board’s ‘responsibility to adapt the Act to the changing patterns of industrial life.’”

What Is the New Test for Finding Joint Employer?

So what exactly is changed? Previously, an employer had to exercise direct and immediate control over the terms and conditions of employment to be found to be a joint-employer. Under the new standard, what matters is whether the purported joint-employer possesses the authority to control the terms and conditions of employment, either directly or indirectly. In other words, the actual or potential ability to exercise control, regardless of whether the company has in fact exercised such authority, is the focus of the Board’s inquiry.  As the Board puts it, “reserved authority to control terms and conditions of employment, even if not exercised, is clearly relevant to the joint-employment inquiry.” (emphasis added).

The Board’s decision also extends joint-employer status to employers that only exercise a degree of indirect control over the work performed by the employees of another. By way of example, in support of its holding that Browning-Ferris Industries (“BFI”) was a joint-employer of the employees of its contractor, Leadpoint Inc., a supplier of temporary labor, the Board emphasized that BFI had “communicated precise directives regarding employee work performance” to Leadpoint supervisors.

Why This Matters

As former NLRB Chair Wilma Liebman told Noam Scheiber of The New York Times, the Board’s decision changes the critical fact of which company is required to negotiate when employees unionize: “This is about, if employees decide they want to bargain collectively, who can be required to come to the bargaining table to have negotiations that are meaningful,”

One significant indicator of how broadly the Browning-Ferris decision will be applied may be seen when the decisions issue in the pending unfair labor practice charges in which McDonald’s is alleged to be a joint-employer of the employees of various franchisees. While the full import of Browning-Ferris may unfold over years of administrative litigation and court review, we know that the obvious (and intended) effect of the decision is to permit the Board to find joint-employer status where it did not previously exist. Indeed, the Board majority notes that extending joint-employer status is necessary to “encompass the full range of employment relationships wherein meaningful collective bargaining is … possible.” Notwithstanding the arrangements employers and contractors have made in years past to guard against joint-employer exposure, unions will be at the ready with unfair labor practice charges and representation petitions as vehicles for the Board to apply its new standard and examine or reexamine relationships forged before the pronouncements of Browning-Ferris. Thus, employers should anticipate a role in newly filed proceedings alleging joint-employer status – even as they contemplate reforming or redefining terms by which they engage with contractors and other providers of services supportive of their business.

Especially troubling is the prospect that the Board, in its zeal to create new applications for its joint-employer criteria, will ignore existing facts showing no actual exercise of control by one employer over employee relations of another, and instead look for control that potentially could be exercised in an ordinary arm’s length business relationship.

Given these circumstances, even those employers who do not exercise any direct or indirect control over the employees of their contractors should review carefully the terms of such arrangements, keeping in mind the Board’s stated intention of expanding joint-employer status.

What to Do Now

It is not an exaggeration to say that the new standard for determining joint-employer status will impact employers in almost every industry across the country.  As a first step, employers will want to closely examine their relationships with those who provide them with temporaries and other contingent workers, and their contracts and relationships with those other businesses that provide integral services and support, to assess whether there is a vulnerability to findings of joint-employer status.

The National Labor Relations Board has issued an Order (PDF) denying a request for a special appeal filed by McDonald’, USA, LLC and its franchisees (collectively referred to as “McDonald’s” in the Board’s Order) and found that the Administrative Law Judge presiding in the unfair labor practice hearing did not err when she denied McDonald’s motion for a bill of particulars explaining the factual basis for the General Counsel’s claim that McDonald’s, USA, LLC and the named franchisees are joint employers.

The ALJ Had Denied McDonald’s Motion for a Bill of Particulars

McDonald’s had asked the ALJ, if she denied its request for a bill of particulars explaining the facts that the General Counsel intended to reply upon in support of its claim that the franchisor and its franchisees are joint employers, to strike the joint-employer allegations and dismiss the 2014 complaint.  McDonald’s had argued that without the information that it was requesting, and an explanation of what the General Counsel would rely upon in alleging a new standard for evaluating whether there was a joint employer relationship, it would be denied due process.

The Board Majority’s Ruling

In the short five-paragraph August 14, 2015 Order, Chairman Mark Pearce and Board Members Kent Hirozawa and Lauren McFerran found that Administrative Law Judge Lauren Esposito “conducted a well-reasoned analysis of the relevant authority and its application to the pleadings in this matter,” when she denied their motion for a bill of particulars or to dismiss.  The majority based its decision on its conclusion that “the consolidated complaint was sufficient to put McDonald’s on notice that the General Counsel is alleging joint employer status based on McDonald’s control over the labor relations practices of its franchisees.”

Members’ Miscimarra and Johnson’s Dissent

Board Members Philip A. Miscimarra and Harry I. Johnson, III did not agree with the majority and issued a far lengthier dissent, in which they argued that the denial of the request for permission to file a special appeal of the ALJ’s Order “presents an acute due process problem and is shortsighted in terms of prudently managing the Board’s resources and minimizing the burden placed on the parties.”

The dissent pointed out that although the complaint “is consistent with the Board’s current joint employer standard,” “the complaint language provides no notice regarding the new joint employer standard upon which the General Counsel intends to rely upon in the alternative, nor what facts the General Counsel believes will prove joint employer status under the alternative standard.”  Significantly, as the dissent noted, that “alternative theory may be the sole basis for finding that Respondent violated the Act” despite the utter lack of notice in the complaint regarding the underpinnings of that theory.

What This Means

Such a denial of due process, as the dissenters pointed out, means that if the Board ultimately, at the end of these lengthy, expensive and time consuming proceedings, finds that McDonald’s is a joint employer with its franchisees under the alternative theory, and that the Act was violated, “Respondent [McDonald’s] will have a plausible and potentially compelling argument that its due process rights have been violated – and the Board may find that it has expended substantial resources building and litigating a case on an unstable foundation.”

The National Labor Relations Board (“NLRB”) unfair labor practice hearing  against McDonald’s, USA, LLC (“McDonald’s) and numerous franchisees opened in New York City on Monday March 30, 2015, before Administrative Law Judge (“ALJ”) Lauren Esposito. (“ALJ”), a former NLRB field attorney and union lawyer. Also this week, the Service Employees International Union (“SEIU”) announced that it was investing an additional Fifteen Million Dollars in the Fight For Fifteen campaign, which seeks to organize fast food workers nationwide and that a series of events would take place across the country on April 15th as part of that effort.

In the McDonald’s cases, under the terms of a Case Management Order issued by ALJ Esposito on March 3, 2015, the ULP hearings are scheduled to take place in three phases, with adjournments between each phase.  The hearing which began this week in Manhattan will start with the closely watched claims by the Board’s General Counsel that McDonald’s and its franchisees are joint employers.  The General Counsel will produce witnesses who will offer testimony and evidence on the nationwide joint employer issue and will continue with evidence of joint employer status and evidence on specific violations allegedly committed by the franchisees in New York and Philadelphia.  The hearing will then move to Chicago and will conclude in Los Angeles with the presentation of evidence of joint employer status and evidence regarding specific violations alleged to have occurred in the Midwest and California, respectively.

As we previously reported, on December 19, 2014, the General Counsel of the NLRB issued 13 Consolidated Complaints in Regional Offices across the country charging that McDonald’s and franchisees are joint employers and seeking to hold McDonald’s liable for unfair labor practices allegedly committed by its franchisees. The NLRB’s press release broadly outlined the basis for its decision to issue the Complaints:

“Our investigation found that McDonald’s, USA, LLC, through its franchise relationship and its use of tools, resources and technology, engages in sufficient control over its franchisees’ operations, beyond protection of the brand, to make it a putative joint employer with its franchisees, sharing liability for violations of our Act.  This finding is further supported by McDonald’s, USA, LLC’s nationwide response to franchise employee activities while participating in fast food worker protests to improve their wages and working conditions.”

As a result of the interest generated by these cases, the NLRB has created a separate webpage entitled “McDonald’s Fact Sheet” with links the Complaints and the docket of proceedings.

At recent public appearances, including at the section meeting of the American Bar Association’s Committee on Developments Under the National Labor Relations Act, General Counsel Griffin addressed the legal theories he relied upon in authorizing the issuance of the Complaints alleging joint-employer status.  He noted that it was the General Counsel’s position that the facts (he did not say which ones) would support a finding of joint-employer status under the Board’s existing legal standards and were not dependent upon the Board adopting a new standard such as the one the General Counsel advocated in the amicus brief filed in the still pending Browning Ferris case in which the Board is considering adopting a new more lenient standard for determining whether a joint-employer relationship.

The General Counsel’s  Consolidated Complaints each contain three identical bare bones allegations with respect to the claim that franchisor and franchisees are joint employers: -“(1) McDonald’s and its franchisees are parties to a franchise agreement, (2) McDonald’s possesses and/or exercised control over the labor relations policies of each franchisee, and (3) McDonald’s and the franchisees are joint employers.”

On January 5, 2015, the General Counsel transferred the cases from Regions 4, 13, 20, 25 and 31 to the Regional Director from Region 2.  On January 6, 2015, the Director of Region 2 issued an Order Consolidating the Consolidated Complaints from Regions 2, 4, 13, 20, 25 and 31 with the already-consolidated cases from Region 2, and set the March 30, 2015 hearing date.

McDonald’s filed its Answer to the Consolidated Complaints and a “Motion for a Bill of Particulars or, the alternative, Motion to Strike Joint Employer Allegations and Dismiss the Complaint” alleging that the General Counsel’s consolidated complaint failed to provide it with sufficient notice of the basis for the joint employer status in violation of fundamental due process, the Administrative Procedure Act, and the Board’s own internal manuals and guidelines.  The franchisees also filed similar answers.  The General Counsel opposed McDonald’s Motion for a Bill of Particulars, arguing that the allegation of a franchising relationship between McDonald’s and the franchisees provides sufficient notice of the allegations.  The ALJ denied McDonald’s motion.  McDonald’s also filed a Request For Special Appeal with the NLRB seeking permission to file an appeal to reverse the ALJ’ Order denying its Motion for a Bill of Particulars.  That too was denied.

McDonald’s also filed a “Motion To Sever” the Consolidated Complaints, to allow for separate hearings for the charges from the six regional offices that had been consolidated for trial in New York.  While the Board’s Rules and Regulations give the General Counsel discretion to consolidate cases the General Counsel’s discretion is not unlimited.  Where the cases involve different factual issues, different backgrounds and different complaints or legal theories, the Board has held that consolidation was not proper.  McDonald’s argued in these cases that consolidation is improper because the cases  consolidated in Region 2 involve 61 charges, and perhaps most importantly, 22 separate distinct and unrelated employers, as well as 181 unrelated allegations and 30 individual restaurants.  McDonald’s urged the judge to sever the complaints so that each individual franchisee will have his or her case heard by a separate Administrative Law Judge in the region where the case arose.

McDonald’s requested oral argument on its Motion to Sever. On February 11, 2015, the ALJ held a telephone conference with McDonald’s and all of the franchisees and their separate attorneys to address McDonald’s motion as well as scheduling issues.  Given the number of parties and significant issues involved, McDonald’s counsel requested that the teleconference be transcribed by a court reporter, which the ALJ denied.  Not surprisingly, the ALJ  denied McDonald’s Motion to Sever.

On March 3, 2015, the ALJ issued a Case Management Order which the General Counsel had requested.  The Order provides that the issue of whether McDonald’s can be held liable as a joint-employer for the unfair labor practices of its franchisees will be heard before trying the merits of the underlying unfair labor practice allegation.  The Order further requires McDonald’s to present its evidence on the joint employer status specific to a franchisee immediately after the General Counsel and the Charging Parties present their evidence specific to the franchisee which allows the General Counsel and Charging Party multiple opportunities to hear and respond to McDonald’s evidence before resting their cases.  McDonald’s filed a Request for Special Appeal seeking to reverse the ALJ’s Order, arguing that its alleged status as a joint-employer is a remedial issue that should be tried only after the General Counsel has proven the merits of the underlying charges against the franchisees alleged to have committed unfair labor practices and arguing that the sequence of trial unfairly allows the General Counsel and Charging Party a preview of McDonald’s case before they rest their cases.

The pressure on McDonald’s by organized labor extends beyond the NLRB proceedings.  This week the New York Times reported that the Service Employees International Union (“SEIU”) has pumped more than $15 million into the Fight for Fifteen movement which seeks to raise the wages at McDonald’s and other fast food restaurants and  retailers to a minimum of $15 per hour and helped persuade the NLRB to go after McDonald’s on a joint-employer theory.

In addition to their NLRB claims, workers at McDonald’s restaurants  in at least 19 cities have also filed workplace health and safety complaints with the Occupational Safety and Health Administration (“OSHA”), alleging that they had been injured and placed in danger on the job because of a lack of adequate training and protective equipment.

The SEIU has arranged for a coalition of European and American unions to accuse McDonald’s of improper tax practices.  Moreover, Organizers for the Fight for Fifteen will hold rallies in New York, Chicago and Los Angeles on April 15, 2015 in which they expect upwards of 10,000 protestors.

The McDonald’s case along with a pending NLRB case involving Browning-Ferris, are significant high stakes litigation which have the potential to fundamentally alter the way employers conduct business with franchisees and third-party contractors.  Last week, the U.S. Chamber of Commerce’s Workforce Freedom Initiative (WFI) issued a 40 page report, “Opportunity at Risk: A New Joint-Employer Standard and the Threat to Small Business.”  The report highlights the administration’s ongoing effort to redefine the concept of “joint-employment” relationships, and how these efforts “threaten to disrupt major sectors of the economy such as franchising and subcontracting.”   The report is essential reading for employers, attorneys and anyone else interested in what the impact would be on the economy and employer-employee relations if the legal standards for determining joint-employer status change in the way that the Board’s General Counsel and the SEIU and other unions are urging in the McDonald’s cases and elsewhere.

We will continue to monitor these case closely and keep you appraised of new developments.

By Maxine Neuhauser

For retail and hospitality industries especially,  it is turning out to be a long, hot summer as franchises continue to be in the employment law spotlight.

On July 29, 2014 the NLRB’s General Counsel announced a decision to treat McDonald’s, USA, LLC as a joint employer, along with its franchisees, of workers  43 McDonald’s franchised restaurants with regard to unfair labor practices charges filed by unions on behalf of the workers and authorized charges against of both the franchisees and McDonalds. (See our July 30 blog post  and Aug. 14 blog post)

Then, on August 5, 2014 New Jersey U.S. District Court Judge Rene Bumb,  ruled in Naik v. 7-Eleven that four franchise owner-operators of Indian descent may pursue overtime and minimum wage claims against franchisor 7-Eleven under both the federal Fair Labor Standards Act (“FLSA”) and the New Jersey Wage and Hour Law (“NJWHL”). In deciding 7-Eleven’s motion to dismiss plaintiffs’ wage claims, the court held that the complaint asserted sufficient factual allegations to establish, if proved, that the plaintiffs are employees of 7-Eleven, and not independent franchisees.  The decision has potential wide-ranging implications regarding the coverage and application of host of employment law statutes, as well as potential joint employment and labor-management issues.

The plaintiffs each entered into a 7-Eleven Store Franchise Agreement (“FA”) which characterizes the parties’ relationship as that of franchisor/independent contractor. Plaintiffs allege, however, that, they are they are actually 7-Eleven employees and entitled to overtime and minimum wage.

The court ruled that the language of the FA characterizing plaintiffs as independent contractors  was not alone sufficient to carry the day for 7-Eleven and instead applied a weighing of the factors and economic realities analysis, used when classifying individuals working directly for a business.

The court found that the factors weighed in favor of plaintiffs being characterized as employees, including the factor asking whether the services rendered by plaintiffs are integral to the defendant’s business. As to that element, the court stated, “It is unclear how Defendant could run their business at all without its franchisees [,]” this, despite the fact that franchisees are integral to a franchise business by the very nature of the business model.

The court did not accept that 7-Eleven’s alleged regulation of vendors, equipment maintenance, product supply, uniforms, and implementing a standardized store environment constitute mere quality control measures to ensure uniformity. Rather, it found that the plaintiffs’ allegations, “depict an economic reality of dependence” on 7-Eleven, which supported their classification as employees.

The motion to dismiss comes at an early stage of the ligation and the court’s decision to let  the cases proceed is not a decision on the merits.  Nevertheless the court’s legal analysis in deciding the motion, has certainly raised questions regarding intersection of franchise law and employment law that bear watching – both in terms of application of employment law statutes  and with regard to joint employment.

As a side note, the court dismissed plaintiffs’ claims alleging national origin discrimination and harassment in violation of the New Jersey Law Against Discrimination, but on reasons unrelated to the plaintiffs’ status as employees or independent contractors.

Following the NLRB’s announcement on July 29th of its position that McDonald’s and its franchisees are joint employers, commentators across the spectrum have been opining about this actually means for employers, unions and workers.

This week the AFL-CIO weighed in with its opinions in a post on its blog AFL-CIO NOW.  After recounting the background of the developments, in section called “What’s the Big Picture?” the author points out how organized labor intends to take advantage of the Board’s anticipated broadening of the standards for finding joint employer status:

“Even though this story has a long way to go, this is “pretty significant,” says AFL-CIO Legal Counsel Sarah Fox. What makes this case so interesting is that the joint employer doctrine can be applied not only to fast food franchises and franchise arrangements in other industries, but also to other practices companies use to avoid directly employing their workers, such as subcontracting, outsourcing and using temporary employment agencies. “Companies are increasingly using these kinds of arrangement to distance themselves from their workers and shield themselves from liability as employers,” says Fox. “These are the devices they use so that they can get the benefit of the work the employees do, but say ‘I’m not responsible’ for unfair labor practices, health and safety violations, paying proper employment taxes or complying with other legal responsibilities of an employer.”

The notion of the joint employer doctrine is an important concept for holding employers responsible, even if there’s a third party involved, when they are effectively exerting control over wages and working conditions.

As we have predicted, big labor and the NLRB both see these developments, under the rubric of the “economic realities” theory argued by the Board’s General Counsel in its brief to the Board in Browning-Ferris as calling for a new test for determining joint employer status – one which the AFL-CIO sees as allowing unions and workers to go after the companies that contract with other employers, through subcontracting, outsourcing and using temporary employment agencies,” in an effort to hold the customer responsible for its suppliers’ employment practices.

Expect to see these theories raised with ever increasing frequency in a broadening circle of relationships.

NLRB General Counsel Richard Griffin announced on Tuesday July 29th   that he has authorized issuance of Unfair Labor Practice Complaints based on 43 of 181 charges pending against McDonald’s, USA, LLC and various of its franchisees, in which the Board will allege that the company and its franchisees are joint-employers. If the General Counsel prevails on his theory that McDonalds is a joint employer with its franchisees, the result would be not only a finding of shared responsibility for unfair labor practices, but could also mean that the franchisor would share in the responsibilities of collective bargaining if unions are successful in organizing franchisors’ workers.  The news, which comes as Fast Food Forward, which is affiliated with the Service Employees International Union (“SEIU”) wraps up its convention in Illinois.

In May of this  this year, General Counsel Griffin signaled his intent to ask the Board to revisit the standards for determining when and in what circumstances two or more employers could be found to be joint employers.  At that time the General Counsel invited the filing of amicus briefs in Browning-Ferris, the General Counsel asked interested parties to share their views on the following questions:

  • Should the Board adhere to its existing joint-employer standard or adopt a new standard?
  • What considerations should influence the Board’s decision in this regard?
  • And If the Board adopts a new standard for determining joint-employer status, what should that standard be?
  • If it involves the application of a multifactor test, what factors should be examined? What should be the basis or rationale for such a standard?

While submissions in Browning-Ferris on these questions were to be received by June 26, 2014, it would appear that the General Counsel has reached his decision that a new standard should be adopted and that it should be a much broader one than has been applied in the past.

Under the Board’s practices, the Advice Memorandum issued in the McDonald’s cases has not yet been made available to the public.  While the General Counsel has indicated that absent settlement in the 43 cases that he finds to have merit the Board’s regional directors are directed to issue unfair labor practice complaints and to try the cases before the Board’s Administrative Law Judges, it has been reported that McDonald’s will contest the matters, noting that it does not direct hirings, terminations or the setting of hours and wages by its franchisees and that it has never been found to be a joint employer with them in the past.

Adoption of a new standard for determining whether a joint employer relationship exists between companies in these and other circumstances, such as between companies and those to whom they outsource work and functions could have far broader implications beyond the franchise setting.