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NLRB overturns rule that made companies liable for franchisees' and contractors' workers

NLRB overturns rule that made companies liable for franchisees' and contractors' workers
About 90% of McDonald's U.S. restaurants are operated by franchisees. They set prices and wages, but McDonald’s still tells them how to operate their restaurants. (M. Spencer Green / Associated Press)

The National Labor Relations Board overturned a landmark Obama-era rule this week that had left companies vulnerable to lawsuits filed by employees of franchisees and contractors over labor violations.

Groups representing companies in industries such as restaurants, retail and home construction hailed the decision, which was announced late Thursday. Unions and other worker advocacy groups derided the move, which limits corporate liability in incidents such as labor law violations. Many companies use franchisees or contractors to cut costs and limit liability.

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For McDonald’s Corp., the largest franchise operator in the world, the decision is not only a validation of its model, but it also bodes well for a decision in a separate case NLRB staffers are pursuing that challenges the corporation’s liability. In 2014, the labor board issued 13 complaints against McDonald’s and some of its franchisees, calling them joint employers and alleging they violated labor rights of employees at various restaurants nationwide.

Oak Brook, Ill.-based McDonald’s runs only about 10% of its 14,000 U.S. restaurants. The rest are operated by franchisees, who McDonald’s says are independent operators who control things like setting prices and wages. But McDonald’s still tells franchisees how to operate their restaurants, providing direction on topics including how to staff locations and when to clean the bathrooms. McDonald’s declined to comment.

The labor board’s Thursday decision reverses a 2015 standard set in a case involving now-disbanded waste management company Browning-Ferris Industries. That decision said a company could be considered a joint employer — alongside a franchisee — even if it did not have direct control of an employee.

In Thursday’s 3-2 party-line vote, the board said parent companies have to exercise direct control over a group of employees in order to be held responsible for labor law violations along with their franchisees.

The National Restaurant Assn. said in a statement that the decision “restores years of established law and brings back clarity for restaurants and small businesses across the country.”

Granger MacDonald, chairman of the National Assn. of Home Builders, also applauded the decision. In a statement, he said he believed that the “Browning-Ferris decision in 2015 made the standard for joint employment so broad and vague that an employer could be held liable for the labor and employment practices of independent contractors and subcontractors over which they have no direct control.”

But Christine Owens, executive director of the National Employment Law Project, a labor advocacy group, called the reversal “just one more example of the Trump administration favoring corporations over working people.”

“In this economy, employers are increasingly subcontracting out vital parts of their business to other contractors and/or using temporary employment agencies to fill vital positions,” she said. “Browning-Ferris rightly held these companies responsible for the labor standards under their own control. With this reversal, the Trump NLRB has decided to let them off the hook.”

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