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Another Labor Relations Overreach

exterior of a McDonald's in Miles City, Montana
photo by David Schott

Suppose that on some dusty roadside, in a far-off corner of the American West, a renegade McDonald’s franchise owner hung a sign in his store window: HELP WANTED. WHITES ONLY.

It might take five minutes for a complaint to be filed with government civil rights lawyers. Maybe 10, depending upon how soon a vehicle came upon this lonely outpost of Jim Crow. I’d guess it would take about the same amount of time for a lawsuit to be filed under the Civil Rights Act of 1964. McDonald’s would quickly remind the franchise owner of his contractual obligations, or maybe even pull the franchise because of the damage it has done to the company’s treasured brand. In short, it would not take long for the errant franchise owner to regret his inappropriate, hateful, illegal behavior. Deservedly so.

But should McDonald’s Corp. itself face fines or other punishment for the errant conduct of its independent franchisee? The company’s contracts demand that franchised outlets conduct their business lawfully. It typically moves promptly to enforce those provisions. But McDonald’s does not recruit, interview, hire, supervise, evaluate or terminate store employees. It does not set their hours, adjust their schedules, scramble for replacements to cover shifts when they call out, make their payroll, or promote or fire them according to their performance. McDonald’s is not the employer in any legal, conventional sense of the word. A franchisee does all these things, and so the franchisee is the employer in nearly every way that it matters.

Yet the general counsel of the National Labor Relations Board disagrees.

In a ruling that is just the latest in a series of outrageous overreaches under the Obama administration involving the labor board, the general counsel ruled that McDonald’s, because of its detailed and stringent contractual relationships with its franchisees, can be held jointly liable with its store owners if the stores violate federal labor laws. The liability is extended through naming McDonald’s a joint employer, a classification that could stick the parent company with responsibility for their franchisees’ actions, even when the company lacks any real authority or direct participation in those choices beyond the contract provisions inherent in a franchise.

An extension of the reasoning in this decision illustrates its absurdity: If I require my employees to show up on time, and one of my workers gets a speeding ticket on the way to work, then I am jointly responsible for paying the fine because I told the worker she had to live up to her obligations to me and she cut corners in order to do so.

From a legal standpoint, the decision is nonsense. It might stand up with the NLRB itself, which under its Obama-appointed majority is essentially a mouthpiece for organized labor. If it did, it could threaten franchised businesses ranging from fast-food restaurants to car dealerships, not to mention companies that rely on temp agencies and subcontractors. But if McDonald’s chooses to pursue the case as far as the Supreme Court (which I sincerely hope it will), I have no doubt the Court will reject the NLRB’s rationale.

That is, of course, assuming the case gets that far. A similarly outrageous ruling against Boeing’s plan to produce its 787 Dreamliner aircraft in a nonunion South Carolina factory was dropped in 2011 after an outcry from the business sector, as well as from congressional Republicans.

More than 100 of the NLRB’s rulings were tossed in the dumpster after the Supreme Court ruled this year that Obama’s so-called recess appointments to fill board vacancies were invalid. The simple and obvious reason - ignored by the president and vapidly justified by his yes-men - was that Congress was not in recess when the appointments were made. Thanks to the Senate’s new filibuster (or anti-filibuster) rules, many of the discarded rulings will likely be reinstated now that the board has a properly confirmed majority, but at least the reinstated decisions will properly follow the mechanics of the law.

Not so in the ruling in the McDonald’s case. To reach the result that the administration’s appointees preferred for policy and political reasons, the general counsel ignored the actual legal relationships that exist among McDonald’s, its franchisees, and the people who work behind the stores’ counters and in the stores’ kitchens.

If the ruling stands, then there is effectively no such thing as a franchise or subcontractor arrangement in American commerce any longer. Such a radical recasting of commercial relationships under the law would require a major legislative overhaul - one that would make the fight over Obamacare look like a Christmas caroling session. But if you are prepared to operate without legal authority, as the Obama-era NLRB has repeatedly shown itself ready to do, such a legislative battle is not necessary. In fact, it would only get in the way.

In half a year, this administration will enter its final lame-duck stage. But we will have to live with Obama’s NLRB, and the anxiety and business disruption it seeks to cause at almost every opportunity, for a considerably longer period.

I hate to impose on my Western friends, but I can’t wait to see this NLRB crowd get exiled, preferably someplace deep in the sagebrush. They can open a McDonald’s when they get there and run it any way they want, as long as they follow the law and honor their contracts.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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