Suddenly Every McDonald's Franchisee Is Worth Suing

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You're off from school for the summer, and you answer a "Help Wanted" sign and get a job at your local McDonald's. Who is your employer?

Until now, the answer to the question has been obvious. Your employer is the person who posted the "Help Wanted" sign, hired you, signs your paychecks, and gives you a nasty look when you come in late.

The National Labor Relations Board is trying to change all that by moving to consider the parent company, McDonald's USA, as your joint employer. If the NLRB gets its way, you might have two bosses.

On July 29 the general counsel of the National Labor Relations Board, Richard Griffin, stated that complaints against McDonald's franchisees would also be considered complaints against McDonald's USA. In plain English, that means that if an employee charges his boss with an unfair labor practice, such as withholding pay or being forced to work too many hours, McDonald's USA is also responsible.

Franchise owners do not want any interference from McDonald's USA on how to treat employees or run their business. The one group that is happy is the class action plaintiffs' bar, because lawyers will now be able sue McDonald's USA rather than a local McDonald's for any unfair labor practices or any allegations of wrongdoing.

Not that McDonald's franchises are systematically guilty of unfair labor practices. Over the past 20 months, the NLRB found merit in 43 unfair labor practice claims out of 181 brought to the Board, according to the New York Times, representing three tenths of one percent of all U.S.

McDonald's 14,000 locations. If a franchise is only worth $1 million, it is not worth suing. But if the franchisor is a joint employer, McDonald's USA, with a value of $100 billion, suddenly every local McDonald's franchisee is worth suing.

Until now, the NLRB has defined employers as those who control workers' "essential terms of employment," meaning hiring, wage rates, firing, and job description. Employers were the franchisees (your boss), not the owner of the franchise (McDonald's USA). But the NLRB is looking to change that, and its new authorization is an integral part of the new employment landscape.

It's not just the plaintiffs' bar that stands to gain, it is also unions. Union-funded worker centers such as Fight for Fifteen are organizing demonstrations to raise fast food workers' wages to $15 an hour from the federal minimum of $7.25. They hope to attract enough workers with the promise of a higher wage to be able to unionize the fast food workers. On June 26, General Counsel Griffin stated in an amicus brief in another case, Browning-Ferris, that "the Board should abandon its existing joint-employer standard because it undermines the fundamental policy of the Act to encourage stable and meaningful collective bargaining." (italics added)

Griffin is seeking a new standard that will promote collective bargaining and unionization. In the amicus brief, he "urges the Board to adopt a new standard that takes account of the totality of the circumstances, including how the putative joint employers structured their commercial dealings with each other. Under this test, 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, joint-employer status would be established."

What the NLRB wants is for McDonald's USA to encourage unionization at its franchises. Employees would have to pay dues and initiation fees, and employers would be under pressure to pay higher wages. No matter that this would encourage automation and lower employment, as has been the case in Europe.

Griffin has worked for organized labor throughout his career. Before assuming the position of general counsel, Griffin was one of the acting NLRB members "recess appointed" by President Obama in January 2012. The appointments were struck down by the Supreme Court in June. Prior to his unconstitutional recess appointment, he was general counsel of the International Union of Operating Engineers (IUOE), where he held leadership positions over the past 30 years, and he was a member of the AFL-CIO Lawyers Coordinating Committee Board of Directors.

David Moberg, senior editor for the labor publication In These Times wrote last week, "If the ruling stands, workers will have stronger legal grounds for pressuring McDonald's to remain neutral-and, in turn, keep franchisees neutral-on allowing workers to decide on a large scale whether they want a union."

Moberg is referring to "neutrality agreements," arrangements between employers and unions that make the workforce easier to organize. When employers sign neutrality agreements, an Orwellian term that means the opposite of neutral, they are not remaining neutral in the workers' choice of whether to be represented by a union. They assist in the unionization process without presenting the disadvantages of union representation, as was the case with the failed campaign for union representation at a Volkswagen plant in Tennessee earlier this year.

In most neutrality agreements, companies agrees not to say anything against the union, and allow union bosses to use work hours to lecture workers about the advantages of joining a union, without presenting an alternative. Such agreements give the union access to company premises to distribute information union authorization cards, and give the union employees' home addresses and phone numbers so union officials can visit workers at home. Companies agree to recognize the union if a certain number of authorization cards are collected, rather than holding a secret ballot election.

The bottom line: if the ruling holds, either McDonald's allows its franchises to be unionized, or it will have to defend itself against a costly stream of unfair labor practice claims.

Union membership is declining, and with it the dues that fund the generous salaries of the union officials and the contributions that unions make to political parties, the vast majority to Democrats. In the 2012 election cycle, the Service Employees International Union gave $25 million and the United Food and Commercial Workers International gave $11 million. Both stand to profit from the new flow of dues if McDonald's is unionized.

McDonald's has two characteristics that make it ideal as a target. Its outlets cannot move overseas, and employees have high turnover.

A dissertation by Michael Harris at the University of Arizona estimated that turnover at McDonald's is 157 percent annually. Most people leave within three or four months. Initiation fees to join a union can range from $50 to $100. The union gets not only a stream of dues, about 2 percent of paychecks, but also a stream of initiation fees. I calculate that unions stand to gain about $155 million from unionizing half of McDonald's workforce, $45 million of that from initiation fees alone.

A decision by the Board that franchisors were joint employers could take several years to play out in the courts, with years of uncertainty. If at the end of that process franchisors are ruled joint employers, the entire franchise model would have to change, to the detriment of those who want to run their own businesses.

It is far easier to start a small business by purchasing a franchise, which is why the model is so popular. Franchisees get publicity, accounting systems, suppliers, premises, operational instruction, and a customer base attracted by the brand name. They employ over 8 million workers, and hire an additional 220,000 annually.

Labor groups and plaintiffs' lawyers saw last week's NLRB announcement as a victory. But there are no deserving winners, only losers: McDonald's, its franchisees, its employees who are now at risk, and consumers across America whose fast food just became more expensive.


Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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