There has been so much bad news in the world of late that it is hard to find time to comment on the July 29 decision by National Labor Relations Board General Counsel Richard Griffin, Jr. to treat McDonald’s as a “joint employer” with its franchisees for the purposes of labor statutes.  That decision, if upheld, would subject McDonald’s to liability for all the actions that its franchisees take with respect to their employees.

In the particular cases before Griffin, the potential finding of liability is said to be for “activities surrounding employee protests.”  But everyone knows that these actions are just the tip of the enforcement iceberg.  Griffin’s real target is to allow individual workers, backed by union dollars, to bring actions for minimum wage and overtime violations under the Fair Labor Standards Act, and to make McDonald’s — and, by implication, all other franchisees — fair game for union organizers and reverse the major decline in union membership.

The decision here is properly understood as a gatekeeper decision. Before the decision, the gates against the NLRB were shut tightly by the conventional tests used to determine whether any given party should be treated as an “employer” under the NLRA. Most unhelpfully, the act defines an employee as including “any person acting as an agent of an employer, directly or indirectly” (after which it exempts a whole host of government employers from the statutory definition). Some further clarity is added to the discussion by the statutory definition of an “employee,” which does not include “any individual having the status of an independent contractor.”

That definitional component was added into the basic law by the Taft-Hartley Act of 1947, itself a response to the 1944 Supreme Court decision in NLRB v. Hearst Publications.  In Hearst, newsboys that purchased papers from the company, but had their own profit and loss responsibility, were shoehorned into the employee category even though the common law definitions on the subject would classify them as independent contractors (which took yet another beating in the NLRB’s recent crusade to convert varsity athletes into university employees).  Contractors, roughly speaking, receive instructions from their employers as to what to do, but figure out how best to do it themselves.

There is often a fine line between a joint employee and an independent contractor.  Often employers try to change the status in order to avoid the risk of unionization or the obligation to pay various kinds of health care and unemployment benefits, while still maintaining ways to control the workers’ daily activities.  Decisions on cases that land right on the border of this fine line require a relatively close look at the facts.  In dealing with such cases, the well-established test was articulated in the 1982 decision of NLRB v. Browning Ferris, which held that “where two or more employers exert significant control over same employees, and where from evidence it can be shown that they share or codetermine those matters governing essential terms and conditions of employment, they are ‘joint employers’ within meaning of National Labor Relations Act.”  Multiple other cases have followed this definition.

Faced with this solid wall of precedent, one might have thought that Griffin, in his role as General Counsel, would have let employers and employees know the grounds for this decision.  But, lo and behold, nothing: he just announced his bare conclusion in a short press release.  That yawning gap has been filled, after a fashion, by strong union defenders whose normative posture is that, under the modern realities of employment, McDonald’s “should” be treated as if it were an employer, even if it appears it is not.  Thus Alison Griswold, who covers business and economics for Slate, can write a piece headlined “The McDonald’s-NLRB Kerfuffle Suggests That Our Labor Laws Are Woefully Out of Date.”  Her explanation comes from union organizers who castigate McDonald’s for seeking “the best of both worlds,” by making franchise wide-decisions on such matters as menu and decor, while “offloading” employment decisions to the local franchises.

The first difficulty with this position is that it does not explain why the rules that worked with franchises in 1982 are obsolete today.  The exact same issues about the proper division between system-wide and local control arose back then, too, yet the union defenders point to no changes in franchise strategy that would justify any change in the legal treatment of franchisors. 

Worse still is that the arguments raised here are just wrong as a matter of principle.  It is not that McDonald’s escapes liability “by saying that the franchisee, and not its corporation, determines wages and working conditions in those restaurants.”  It escapes liability because its franchisees — in fact and by contract — do have the exclusive control over these matters.  The franchise cases are thus wholly different from the standard disputes where one party says that someone else has control of the employment arrangements which it has in fact retained by various forms of subterfuge.

The current business model for franchises is not accident.  The rules in question were developed to remove the franchisor from all employment decisions because, even in the absence of any union threat, it has no advantage in dealing with employment issues.  The individual franchisee is on the spot and can monitor both the behavior of its employees and the relevant market conditions that inform its key employment decisions.  The franchisee also has all the right incentives to get those decisions right.  For McDonald’s to share control would gum up the activities at the franchise level and put the corporation in the impossible position of having to choose between two evils: either it faces charges for willful neglect of its newly-minted employer duties if it lets the franchisee run its own business, or it must expend huge sums of money in ways that make the overall operation of the system less efficient and more costly than it ought to be. 

By the same token, any successful franchise system has to standardize its products so that potential customers know what they are going to get no matter which location they visit.  To let individual franchisees play with décor or the menu opens up the franchise arrangement to massive cheating.  Each individual franchisee knows that if it cuts back a bit on quality, most of the losses will be absorbed elsewhere — by either the franchisor or the other franchisees.  To preserve its reputation for uniform quality, any franchisor has to do just what McDonald’s does — monitor those standard to protect its customer base and to protect each franchisee from the opportunism of others. 

The current division of responsibility makes perfect sense as a business matter.  It is therefore all too clear why Mr. Griffin chose to strike out on this dangerous path.  His list of credits includes tours of duty as the General Counsel for the International Union of Operating Engineers and as a member of the board of directors for the AFL-CIO Lawyers Coordinating Committee.  This is yet another instance in which the full-time partisans in the management-labor struggles take on important public positions in which independence of thought and action is necessary.

One reason why the National Labor Relations Board is such a disaster area is that it is not possible, under the current configuration, to get anything close to a neutral actor, regardless of which political party is in power.  That situation has to change fast.  As this partisan exercise shows, the supposed expertise needed to be General Counsel of the NLRB is slim-to-none.  The danger of partisan prejudice is huge.  The first modest step in this area should be to insist that the General Counsel of the NLRB have no experience or connections in the area.  Otherwise, partisan decisions like this one will continue to bedevil labor markets. 

We have enough problems in reviving labor markets as is, especially at the bottom end of the economic ladder.  Griffin’s unthinking decision to sue McDonald’s only makes a bad situation worse.

Image Credit: Flickr user Ruper Ganzer.