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McDonald’s $13 Hourly Pay Skirts ‘Joint Employer’ Liability Risk

May 14, 2021, 6:56 PM

McDonald’s Corp.'s promise to boost pay at company-owned locations falls short of setting higher wages for the vast majority of its U.S. locations, a move that helps the fast-food giant avoid sharing liability with franchisees for labor and employment violations.

McDonald’s announced Thursday that it would increase wages to an average of $13 an hour at 650 restaurants, following similar action by Chipotle Mexican Grill Inc. earlier this week. They joined major retailers, including Amazon.com Inc., Target Corp., and Costco Wholesale Corp., in raising wages and increasing hiring in the midst of a pandemic-strained labor shortage around the country, as well as a nationwide push for a $15 minimum wage at the state and national level.

Roughly 14,000 franchisee-owned restaurants for McDonald’s, however, won’t fall under the wage boost requirement. That could help shield the corporation from private lawsuits and government enforcement actions alleging that it’s jointly liable for wage and labor claims filed against independently owned locations, attorneys and academics said.

“They were likely careful because of the joint employer issue to require the wage hikes in the company-owned stores,” said Jeff Hirsch, a law professor at the University of North Carolina, who focuses on labor and employment. “Wages are central to working conditions. A mandate from McDonald’s that workers must be paid a certain amount would be weighty in favor of making them liable.”

“Joint employer” liability was a prominent and controversial issue during the Obama era, and it’s one that the Biden administration is already in the midst of resurrecting. The U.S. Labor Department and other agencies could move toward legal tests that would make it harder for the franchise industry and others to avoid it.

“The big picture is there is always concern with a franchise and franchiser agreement,” said Travis Gemoets, an attorney with Jeffer Mangels Butler & Mitchell LLP, who represents employers. “That’s the third rail. The franchiser has to take all kinds of steps not to overstep the boundary or have an argument that they are substantially controlling the worker.”

McDonald’s corporate didn’t immediately respond to a request for comment.

“Franchisees make their own wage and benefits decisions based upon local market conditions that work for their community, and they frequently offer pay and benefits equal to or better than large corporations,” Matt Haller, senior vice president of government relations and public affairs with the International Franchise Association, said in a statement. “McDonald’s Corporation can no more set the pay rate for its franchised restaurants than it can for the Pizza Huts or Starbucks down the street.”

Franchise Locations

McDonald’s has fought fierce battles in recent years to avoid liability in union and wage disputes at franchisee locations.

The joint liability test varies under federal and state laws, but all weigh the type of control a company has over workers’ terms of employment.

“For a franchise, maintaining control is important for their brand, and they have a legitimate interest in that,” Hirsch said. “From that point of view, they’d like to control everything, but then you run into a liability problem.”

He said corporations that encourage independently owned locations to raise wages, as well, could potentially wade into a gray area if the Biden administration views joint employer liability under an indirect control test, as the Obama administration did.

Gemoets said once a brand starts dictating pay rates for individual locations, that crosses the line and would force corporations to be on the hook for discrimination lawsuits, unpaid wages, and union management.

In anticipation of Biden administration action, he is recommending that clients be ultra on guard in case a new standard comes into place.

“My advice to these companies would be broad and precise,” he said. “Even if you say it’s a brand standard to have competitive wages, you’re toast. The touchstone is always the question of control.”

Government Stance

The federal government’s stance on joint employment liability is in the midst of seesawing back to its direction under former President Barack Obama, when several labor agencies adopted broad interpretations of when multiple businesses share responsibility over workplace conditions.

The Biden administration hasn’t prescribed a new policy on joint employment, but is in the process of revoking the Trump Labor Department’s approach. And Biden’s top wage regulator, Jessica Looman, has affirmed the importance of rooting out joint liability as part of her agency’s enforcement actions.

Back in the Obama era, the government’s focus on shared business liability sparked an aggressive franchise industry lobbying campaign seeking to curb what they argued was a crusade on their business model. The business lobbyists found a more receptive audience when Trump took office.

The Trump Labor Department withdrew Obama-era guidance that called for expanded joint employment liability under the Fair Labor Standards Act, which governs minimum wages and overtime, and issued its own regulation that narrowed the circumstances in which businesses could be held jointly liable.

But a federal judge vacated the most significant parts of that regulation last September, about six months after it took effect. The Trump administration appealed that ruling in November, and a coalition of business groups has intervened in the case to try to convince a federal appellate judge to restore the employer-friendly standard.

Still, the Biden administration could render the litigation moot by completing a March proposal to withdraw the Trump joint employment measure. DOL’s Wage and Hour Division is now reviewing public comments on that withdrawal proposal, which it will use to inform a final rule repealing it.

Push for $15 Wage

Meanwhile, union efforts to push McDonald’s to raise wages around the country continue. Worker advocates with the Fight for $15 movement say that their demands aren’t going to change, and that the recent boost in pay points to a greater need for action.

“Clearly, McDonald’s understands that in order to hire and retain talented workers, something needs to change,” Fight for $15 union leader Doneshia Babbitt said in a statement. “They’ve tried offering $500 signing bonuses for new employees and they’ve even tried handing out McChicken sandwiches in exchange for a job interview. Now, they’re raising pay for some of us and using fancy math tricks to gloss over the fact that they’re selling most of us short.”

The group said they plan to strike in 15 cities on May 19, the day before the McDonald’s annual shareholders meeting, to demand $15 for every worker in every restaurant.

The joint employer issue is one of ideology and the system stacks in favor of the employer, regardless of whether they are forced to bargain with workers, said Anne Lofaso, a labor law professor at West Virginia University.

She said if the company wants control, they’ll have to be ready to bargain with workers. “It’s simple,” she said. “Our law is moderate and Biden, at most, will bring more moderation.”

The courts don’t have to listen to the Labor Department guidelines, and anything the administration does can’t go beyond legal precedent about how to interpret joint employer liability.

“Politicians will want to tell you that the sky is falling for companies,” she said. “We have the courts, which will preserve the rule of law.”

Gemoets said it’s clear there is a competitive push to raise wages, and the moves by major chains could signal the beginning of a broader groundswell.

“There’s a fair amount of unemployed people, and we thrive off competition, and competition is king,” he said. “Corporate America realizes they have to step up to fill their ranks.”

—With assistance from Ben Penn

To contact the reporter on this story: Erin Mulvaney in Washington at emulvaney@bloomberglaw.com

To contact the editors responsible for this story: Jay-Anne B. Casuga at jcasuga@bloomberglaw.com; Travis Tritten at ttritten@bgov.com

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