NLRB Rejects McDonald's Settlement Deal in Joint Employer Case

August 29th, 2018

The long-awaited decision from the National Labor Relations Board finally came last month when the NLRB judge issued her decision rejecting proposed settlement agreements from McDonald’s Corporation [NYSE:MCD] surrounding claims by fast food workers that the world’s biggest hamburger chain was a “joint employer” with its franchisees regarding alleged labor law violations.

While McDonald’s expressed its disappointment in the judge’s ruling, stating it would only further prolong “the already lengthy and expensive litigation,” Administrative Law Judge Lauren Esposito placed much of the blame on McDonald’s for the lengthy process. She said after more than 150 days of hearings, only a few days before the record would have closed, NLRB General Counsel Peter Robb and McDonald’s presented a series of settlement agreements purporting to resolve all of the cases in the matter. Esposito said “these ‘informal’ settlement agreements, referred to as such because they do not provide for the issuance of an enforceable Board remedial order, were proffered for my approval over the strenuous objections of charging parties.” She added, “. . . however, certain fundamental elements of any effective settlement are lacking in this case.”

The judge further explained in her Administrative Law Order that it is obvious that a settlement requires a “meeting of the minds,” or a genuine agreement between the parties. “As discussed in detail below [in her ruling], General Counsel and McDonald’s have made so many conflicting statements regarding McDonald’s obligations under the proposed settlements that there is significant doubt as to whether they have actually reached agreement.”

Esposito expressed that a meaningful settlement also requires finality, or a measure of certainty that the settlement will conclusively end the litigation. “Here, the proposed informal settlements' unusual and complicated form and enforcement mechanisms, coupled with the parties' evident confusion and history of antagonism, virtually guarantee that the settlements will not definitively end the case,” she professed.

Judge Esposito further clarified in her ruling that Board caselaw also requires that a settlement be “reasonable” given the nature of the allegations, the inherent risks of litigation. She explained, “Here, the proposed informal settlements are not a reasonable resolution based on the nature and scope of the violations alleged and the settlements’ limited remedial impact, despite the risks inherent in further litigation.”

The judge concluded, “General Counsel's proffered justifications for the proposed informal settlements' significant shortcomings are inadequate and inconsistent with Board policy and practice. As a result, the motions to approve the settlement agreements in this case are denied.”

Immediate response to the NLRB Judge rejecting McDonald’s settlement

The main question surrounding this litigation: Does the franchisor or the franchisee have control over the franchisee’s employees’ working conditions and labor law violations? The factual definition of what franchisees are considered to be in the relationship is that they are “independent business owners.” When franchisors step over the line into the franchisee’s territory, they now, with Judge Esposito’s ruling, can be considered “joint employer” with their franchisee, liable for labor law violations.

After Judge Esposito rejected McDonald’s settlement agreements on July 17, 2018, the media jumped on the story. Free Beacon reported that “organized labor won a small but key victory” with the NLRB judge’s decision. It explained, “Beyond the immediate liability issue at stake in this particular case, the outcome could also impact organized labor’s ability to recruit new members, as unionizing a franchise’s corporate parent would be significantly easier than organizing a union of each franchisee’s employees.” The report said, “If McDonald’s is considered a joint employer, then future unionizing would likely happen against the parent corporation.”

Micah Wissinger, attorney for the Service Employees International Union and affiliated groups, who assisted in representing the workers in the NLRB case, proclaimed, “The way this is all structured, all the liability is on the franchisees, there is no obligation on McDonald’s part. Why she [Judge Esposito] has rejected it is that they have no real obligations to do anything.”

McDonald’s issued its statement saying they will now evaluate their options, which will include appealing the NLRB decision. “As we have maintained throughout this process, McDonald’s USA is not and has never been a joint employer with its franchisees.”

But Free Beacon explained the franchisor’s options and what will now happen. “McDonald’s and Mr. Robb’s office must now decide whether to abandon the settlement approach and resume the trial; try again on a new settlement agreement; or, most likely, appeal the decision to the National Labor Relations Board, where Republicans hold a majority.”

CNBC’s Nightly Business Report published a YouTube video, interviewing Robert Cresanti, CEO/president of the International Franchise Association, regarding Judge Esposito’s decision. He said the ruling was quite terrible for their membership [franchisees and franchisors] because most of the brands and the operators of small businesses don’t have the same resources that large franchise systems have. Cresanti explained that the confusion that has been created with the “joint employer” issue is the question, “Who is the employees’ employer.” He said that is causing enormous pressure for companies in growing their businesses, and for people who want to get into the franchise sector opening new businesses and hiring new employees.

IFA’s top leader then stated, “Last year the House of Representatives approved a measure to provide a clear definition of joint employer, while the Senate has yet to take action on the bill.”

In looking back at the history of this litigation, thousands of fast food workers were organized by Fight for $15 under the Service Employees International Union. A large number of fast food employees from various food chains, McDonald’s, Burger King, KFC, Wendy’s, and others, demonstrated in large cities across the country to protest low wages and unfair working conditions. Selected workers filed the NLRB lawsuits against McDonald’s to determine once and for all that because McDonald’s had excessive control over its franchisees it should be held responsible for the working conditions and labor law violations of its franchisees.

The charges were filed against McDonald’s in 2012, 2013 and 2014, during the Obama administration when the NLRB was under the control of Democrats. The cases filed in different states were then consolidated, in spite of McDonald’s objections. This current lawsuit commenced on March 30, 2015, with opening statements starting in March 2016.

After the election, President Donald J. Trump took over and Republicans regained a majority and managed to veer the NLRB in a direction that was no longer pro-labor.

Keith R. Miller, principal of Franchisee Advocacy Consulting, said, "Like many, I guess I was surprised by the ruling throwing out the settlement. In my opinion, it continues an unknown standard, which means franchisors still must remain cautious about over controlling the franchise owner’s business".

Update: On August 13, 2018, McDonald’s USA, LLC filed through attorneys JONES DAY its Request for Special Permission to Appeal the Administrative Law Judge’s July 17, 2018 Order Denying Motions to Approve Settlement Agreements. It states that its special appeal presents the only question that should have guided the Administrative Law Judge: Whether the settlement in this case satisfies “Independent Stave,” the NLRB’s longstanding policy of encouraging the peaceful, nonlitigious resolution of disputes.

McDonald's 48-page brief begins by stating the following:

This case is more than ripe for settlement. There simply is not a case like this one. Substantively or procedurally, which exponentially increases the risks of litigation and the expected length of the remaining proceedings. On the merits, this case involves an unprecedented claim that McDonald’s USA is liable as a joint employer and an unprecedented attempt to change the law on joint employment, thereby guaranteeing appellate review. In the 60-plus years that McDonald’s USA has franchised restaurants, neither the Board nor the Courts have found the Company to be a joint employer under any standard.

(Photo: NLRB Building Sign, By Geraldshields11)

Janet Sparks

Janet Sparks is a freelance reporter who writes about complex issues related to the franchise industry, including the litigation between franchisors and franchisees.She is the former publisher of Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years, and was an independent reporter/columnist for a leading franchise magazine for over 10 years. Sparks is also a Forbes.com contributor to its leadership/franchise section. She can be emailed at jsparks@bluemaumau.org.