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Commentary By Diana Furchtgott-Roth

McDonald's, Already Struggling, Now Has to Fight the Government

Economics, Economics Employment, Regulatory Policy

This article originally appeared in MarketWatch.

McDonald’s Corp.’s new CEO, Steve Easterbrook, has a major task in front of him in addition to increasing sales of burgers: getting his company out of the clutches of the National Labor Relations Board.

In December, NLRB General Counsel Richard Griffin announced he had issued complaints against McDonald’s MCD, franchised restaurants and McDonald’s USA, the parent corporation, as joint employers. This joint-employment designation is unprecedented, and overturns decades of settled law.

For half a century, the local franchise was considered the only employer, and still is, for everyone except McDonald’s. The NLRB defined employers as those who controlled workers’ “essential terms of employment,” namely hiring, wage rates, firing and job description. The franchises were the employers, not the owner of the franchise.

The National Labor Relations Board says in its fact sheet that McDonald’s USA offers “tools, resources and technology” to its franchises. That gives it the status of a joint employer. According to the NLRB, “this finding is further supported by McDonald’s USA LLC’s nationwide response to franchise-employee activities while participating in fast-food worker protests to improve their wages and working conditions.”

As with many other franchises, McDonald’s offers tools for how to raise sales, and sets out requirements for how burgers should be cooked. McDonald’s also offered advice to franchises when the Service Employees International Union organized strikes against different restaurants last December. But if this makes McDonald’s a joint employer, so are other franchise operations.

Surprisingly, the NLRB is not even letting McDonald’s, or the general public, know the legal reasoning behind the change. I called the NLRB to ask whether I could see the advice memorandum discussing the legal foundation for the change, and I was told that “the memorandum is not available publicly because it’s part of the litigation process.” The spokesman told me that the arguments in the advice memorandum would be available when the case goes before regional administrative judges in the spring.

If the National Labor Relations Board is accusing McDonald’s of being a joint employer, surely it has a right to know the legal reasoning.

The NLRB’s decision is cataclysmic for McDonald’s, and any other franchises to which the new rule is applied. If McDonald’s is considered a joint employer, and sets terms of hiring, then the value of a franchise business is reduced. Employers are entrepreneurs, and they don’t want McDonald’s USA to be a joint employer.

Plus, it raises the possibility of lawsuits. Just as Stella Liebeck won almost $3 million for suing McDonald’s for burns she suffered from hot coffee, people with complaints will be encouraged to sue McDonald’s USA, not just their local franchise. A single-employer franchise may not be worth suing. But if the franchisor is a joint employer, such as McDonald’s USA, with a value of billions, then every local franchise is worth suing.

The reason behind the case is clear: The NLRB wants to make it easier for unions to organize McDonald’s. On June 26, 2014, Griffin, the NLRB general counsel, said 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.”

Unions want McDonald’s to sign agreements saying that the company will not fight unionization measures at its restaurants. Franchises would agree to recognize the union if a certain number of authorization cards are collected, rather than holding an election.

The SEIU wants to organize McDonald’s because of the high rate of turnover in the fast-food industry. With turnover at McDonald’s around 157% annually, then in one year a restaurant turns over its entire staff more than once. That means more initiation fees from new union members, about $50 per person, as well as more dues. Unions stand to gain about $100 million each year from unionizing half of McDonald’s workforce.

Such potential revenues are important to unions because membership is steadily declining. On Jan. 23, the Bureau of Labor Statistics announced that the share of private-sector workers who belonged to a union in 2014 declined to 6.6% from 6.7%. The percent of total U.S employees who are union members declined from 11.3% to 11.1%.

McDonald’s has few complaints about its practices, but that has not stopped the NLRB. The Board found merit in 86 charges filed since 2012, about half of 1% of all U.S. McDonald’s 14,000 locations.

Easterbrook needs to make to clear to Congress that this attack on Big Macs is an attack on the whole franchise way of doing business. If the NLRB is coming for McDonald’s, then it’s coming for other franchises next.

Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. You can follow her on Twitter here.
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