Fast-Food Industry Stuck on Franchisee Training Issue

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By Ben Penn

Oct. 11 — Fast-food franchisers often use the same metaphor when they consider training franchisees on wage-and-hour laws, saying they’re stuck between a rock and a hard place.

Sharing compliance tools like payroll and scheduling software puts franchisers at risk of joint employer liability. That means they could be on the hook to handle union negotiations and workers’ lawsuits that otherwise would be the franchisee’s responsibility. But doing nothing could hurt the brand identity, as the Labor Department consistently finds franchisees shortchanging workers on minimum-wage and overtime pay.

Balancing those concerns, plus the DOL’s major regulatory change to overtime law taking effect in December, has the fast-food industry asking questions about the future of wage-and-hour compliance policy.

“If a franchiser says I’m going to take over and tell you how to pay employees and how they should be clocking in and clocking out, then the Department of Labor is going to come in and say, `Congratulations, now you have to pay,’” Tammy McCutchen, former Wage and Hour Division administrator under President George W. Bush, told Bloomberg BNA.

“If they try to help and increase compliance by their franchisees, the NLRB and the DOL will tell them, `You’re a joint employer,’” said McCutchen, who now represents fast-food franchisers as a principal with Littler Mendelson P.C. in Washington.

David Weil, the WHD’s current administrator, is working to erase these business fears and partner with franchisers to help them boost Fair Labor Standards Act compliance at their national network of franchisees. Those who doubt the feasibility of compliance outreach need look no further than a voluntary agreement the division brokered with Subway in July, Weil told Bloomberg BNA in a recent interview.

Under the agreement, the division will meet regularly with Subway representatives to share enforcement data and explore how franchisees can use scheduling and payroll technology to avoid overtime violations.

Subway executives run a sophisticated business with billions in revenue, and they happily signed the deal, Weil said. “I find it somewhat perplexing that” the naysayers “want to throw rocks at other folks who are trying to do something innovative to address the problems, and yet they have persistent problems on their own, and they often don’t want to take responsibility for those problems.”

McDonald’s, Dunkin’ Donuts, Domino’s and their competitors may feel an urgency to bolster their franchisees’ wage-and-hour practices. The WHD conducted nearly 4,000 investigations at the 20 largest fast-food brands during the Obama administration. It discovered more than 68,000 FLSA violations and recovered some $14 million in back wages for about 57,000 employees, according to a recent Bloomberg BNA analysis. At least one FLSA violation was found in 75 percent of the investigations.

And more pressure to comply is on the way. The DOL’s controversial regulation to expand workers’ overtime access becomes effective Dec. 1. Restaurant assistant managers are among those expected to benefit from the rule by becoming eligible for time-and-a-half pay when working more than 40 hours in a week.

Subway Stands Out From Pack

Other fast-food franchisers have already walked away from top-level negotiations with the WHD to reach a Subway-type of compliance agreement. That’s because the division wouldn’t assure them that they would be shielded from a National Labor Relations Board joint employer finding. The board and the WHD enforce separate statutes that have different joint employer definitions. In this administration, both agencies are interpreting the term more broadly than in the past.

That’s why others in the industry are scratching their heads as to why Subway, the largest fast-food brand in the U.S. with 27,000 stores, broke from the pack. Subway came to terms with the WHD under the condition that franchisee compliance aid would have no effect on their joint employment status under the FLSA. But the NLRB would have the authority to disagree.

“Subway has its own philosophical bent. They do things differently than other franchisers,” Michael Seid, a veteran fast-food franchiser consultant and International Franchise Association board member, told Bloomberg BNA. “I’m not saying they’re right or wrong” to partner with the WHD. “I just don’t understand it.”

Asked directly if the company is confident that the agreement doesn’t create joint employer risk under any statute, Subway spokeswoman Michele DiNello said, “This agreement simply reinforces our commitment to help facilitate education between the DOL and our franchisee community.”

IFA Alleges Joint Employer ‘Booby Traps.’

The IFA, which has lobbied aggressively against the NLRB’s recent joint employer ruling, is taking the stance that the WHD’s attempt to reach more compliance agreements modeled after the Subway pact goes further than simply wage-and-hour training.

“Franchisors would probably do more to educate about wage and hour laws among their independent franchisees if DOL wasn’t setting joint employer `booby traps’ by coordinating with unions, the NLRB and plaintiffs’ attorneys in a thinly-veiled game of gotcha disguised as `outreach and education,’” Matthew Haller, the IFA’s senior vice president for communications and public affairs, told Bloomberg BNA via e-mail.

The board said in Browning-Ferris Industries of California Inc., 362 N.L.R.B. No. 186 (2015), that an entity may be considered a joint employer if it has the right to control workers, even if the entity doesn’t exercise that right.

But Weil rejects the notion that his agency views restaurant franchisers inherently as joint employers, at least under the FLSA. Franchise agreements at eating and drinking establishments are typically structured in a way that “they tend not to have some of the core elements that would lead us to a joint employment setup,” Weil said. “I cannot and would not say across the board, but you see it less frequently” than in other franchised industries.

Franchisers Exert Control

Still, joint employment findings are seen by one plaintiffs’ attorney as the next frontier in fast food, whether or not more brands follow Subway’s lead.

“I think that you’re going to find more and more there are going to be instances both through DOL enforcement and private litigation as well where the argument is going to be mounted that the franchiser exercises so much intimate control over how the franchisee operates that they are in fact joint employers,” said Michael Hancock, who until 2015 was the WHD’s assistant administrator for policy.

“The franchiser is so heavily engaged in the operation of their branded franchisee—their extensive training on how to fry hamburgers or how much cheese goes onto a pizza,” he told Bloomberg BNA. “So why shouldn’t they be equally engaged on labor practices?”

Hancock is now of counsel at Cohen Milstein Sellers & Toll PLLC in Washington, a firm that has alleged in court that McDonald’s is jointly liable with franchisees for wage violations.

Further, a nationwide worker organizing campaign is hoping to leverage the NLRB’s recently loosened joint employer position to bring McDonald’s to the bargaining table on behalf of franchisees. An NLRB administrative law judge is considering whether McDonald’s USA LLC may be liable for alleged unfair labor practices against workers at franchisee restaurants.

Then in May the New York attorney general sued Domino’s as a joint employer, alleging faulty payroll software from company headquarters caused franchisees to underpay workers.

An initiative to train franchisees on wage-and-hour laws, for instance surrounding the new overtime changes, may give labor advocates more ammunition for making the joint employer case.

An attorney representing franchisees, Robert Einhorn, told Bloomberg BNA that this level of control already exists.

“Franchisers have made their bed in terms of exercising so much extreme control in the franchise relationship that they have created their own risk of employer liability,” said Einhorn, a partner with Zarco, Einhorn, Salkowski & Brito in Miami.

Walking the Tightrope

Some franchisers are already taking steps to counsel franchisees.

But they’re doing so with extreme caution, demonstrating the challenge the division faces as it attempts to bring more franchiser allies to the table to follow Subway’s example.

Take Brett Bartlett, a partner at Seyfarth Shaw LLP in Atlanta who represents large franchisers in several industries.

“One of the things that we’ve struggled with, especially with the new exemption rule coming into effect in December, is how do we make sure all of the franchisees know about the change, because some of them frankly don’t,” Bartlett told Bloomberg BNA.

“It’s that fine line that we walk. I’ve been doing training for hundreds of franchisees, trying to make sure that they’re educated while at the same time avoid any suggestion that I’m their lawyer or that they are being directed to do X, Y and Z that I’m talking about,” he said.

After the Subway deal was inked, Bartlett said Seyfarth Shaw told clients “that a global compliance agreement of some sort with the WHD might help secure a predictable approach by WHD.”

Once the joint employer risk and other factors were taken into account, all franchiser clients opted not to sign up, he said.

But Bartlett noted that as the agency embarks on more coordinated large-scale investigations, businesses could be more compelled to sign a deal. “Maybe that will be a tipping point,” he said.

To contact the reporter on this story: Ben Penn in Washington at bpenn@bna.com

To contact the editor responsible for this story: Peggy Aulino at maulino@bna.com

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