Franchise Technology May Tip Scales in Joint Employer Cases

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By Jay-Anne B. Casuga

Nov. 29 — McDonald’s, Domino’s Pizza and other franchisers often recommend or provide technology to help franchisees run their businesses while maintaining brand quality and uniformity. But such systems may leave the companies vulnerable as joint employers in labor and employment law cases.

The use of technology may show that a franchiser has control over franchisee workers’ employment terms and conditions, Wilma B. Liebman, a former chairman and member of the NLRB, told Bloomberg BNA in a recent interview. “It’s a piece of the puzzle,” she said.

The National Labor Relations Board and federal courts are grappling with the issue of joint employment in the franchise industry, with a number of high-profile cases against fast food companies pending.

In those cases—which include the NLRB general counsel’s nationwide action against McDonald’s and various wage-and-hour lawsuits against Domino’s in New York—the use of technology has emerged as an important factor in determining whether franchisers should be held liable as joint employers with their franchisees, observers told Bloomberg BNA. A franchiser found to be a joint employer would be liable for unfair labor practices committed by a co-employer franchisee, under the National Labor Relations Act.

Rulings in the McDonald’s and Domino’s cases could also affect other areas of the law, such as employment discrimination.

But observers also stressed that joint employment findings are fact-specific and will vary on a case-by-case basis.

“Change one fact and it could change the outcome,” Susan N. Eisenberg, a management attorney with Cozen O’Connor in Miami and former chairman of the American Bar Association’s Federal Labor Standards Legislation Committee, told Bloomberg BNA.

Technology Alone Won’t ‘Tip the Balance.’

Control over employees’ working conditions—whether direct, indirect or potential—is relevant to determine joint employer status, according to an August 2015 split decision by the NLRB ( Browning-Ferris Industries of California, Inc., 362 N.L.R.B. No. 186, 204 LRRM 1154 (2015)). The ruling is under review by a federal appeals court in Washington and has been targeted by congressional legislation (see related story.)

In the wage-and-hour context, the federal government and states use a varying number of factors to determine joint employment, which generally is based on economic dependence of the companies at issue.

Given the numerous non-dispositive factors that are considered in a joint employment analysis, requiring franchisees to purchase and use certain software in and of itself probably isn’t going to “tip the balance” in favor of joint employer liability, Eisenberg said.

“It will be interesting to see how much weight the court puts on the technology factor as opposed to the others,” she said.

Eisenberg added that the technology argument hasn’t been fully factually developed yet.

If a franchiser imposes the use of certain technology, for example, and that technology results in errors, a plaintiff arguing in favor of joint employment would have to establish that the franchiser knew that the system wasn’t functioning properly, she said. Additionally, a plaintiff would have to counter the argument that the franchisee, and not the franchiser, is responsible for reviewing the information provided by the system and determining whether it’s accurate.

Is Software Voluntary, Customizable?

Michael J. Lotito, a management attorney with Littler Mendelson in San Francisco and co-chair of the firm’s Workplace Policy Institute, told Bloomberg BNA that “software is a big deal.” But one argument some franchisers could raise against joint employment is that use of the technology by franchisees is voluntary.

In those instances, franchisees have the discretion to use systems or other guidance recommended by the franchiser, said Lotito, who also serves as labor counsel to the International Franchise Association in Washington.

Another consideration is whether franchisees can alter the technology for their particular needs, he said. Further, there may be times when a franchisee can ignore franchiser recommendations based on data provided by those systems.

Lotito gave an example in which a fast-food franchiser analyzes data from a technology system it provided to a local restaurant and suggests to that franchisee a certain staffing level for a particular day based on last year’s traffic. But what if the franchisee instead doubles staffing because good weather is predicted that year, whereas it rained last year and bad weather tends to decrease business?

In that scenario, the franchisee is using the system to inform the way it runs its business, Lotito said.

If franchisees can use whatever technology they want, can alter those systems or use them to make their own operational decisions, then the “argument of joint employment evaporates,” Lotito said.

Technology’s Influence on Multiple Factors

But Liebman, who’s also a visiting scholar at Rutgers University’s School of Management and Labor Relations, said an argument could be made that technology can help establish franchiser control in “a range of relevant factors.” Technology can allow a franchiser to keep tabs on the franchisee’s transactions, employee scheduling, shift positions and wages, and other data that could be used to maximize revenue.

In other words, technology arguably “allows the franchiser to dominate the franchisees,” she said.

“In my view, it enables the franchiser to both receive data about the franchisee’s operations and to provide guidance and structure about the franchisee’s operations that includes a substantial degree of control,” she said.

Even if franchisees aren’t required to use a particular software or systems provided by a franchiser, there are incentives to do so. Profit margins for small franchisees can be small and it would be less expensive to adopt the technology provided by a franchiser than to develop or purchase a system on their own, Liebman said.

Implications for McDonald’s, Domino’s

In the case of McDonald’s, the NLRB’s general counsel alleged that McDonald’s USA LLC indirectly controlled or retained potential control over fast food workers at local restaurants in part because of scheduling systems and payroll software provided by the company.

A negative ruling against the fast food company could have a big impact. More than 80 percent of McDonald’s restaurants around the globe are owned by franchisees, according to the company.

But the joint employer case may be stronger against Domino’s. Unlike in the McDonald’s case, the technology is “quite intrinsically involved in the alleged violations” by Domino’s, Liebman observed.

Wage-and-hour complaints brought this year against Domino’s by the New York attorney general and private litigants contended that the company urged its pizza franchisees to use a software system known as PULSE.

The lawsuits claim that Domino’s knew that PULSE undercalculated workers’ gross wages, leading franchisees to violate minimum wage and overtime requirements under New York law and the federal Fair Labor Standards Act.

A court could find, based on the facts alleged in one of the complaints, that a joint employment relationship exists between the company and its franchisees partly because of technology, according to Harris Freeman, a law professor at the Western New England University School of Law in Springfield, Mass., who has testified before Congress on joint employer issues.

“Technology that permits a franchiser to monitor, alter and dictate the terms and conditions of work at a franchise location is an important factor establishing joint employment, but it doesn’t have to be looked at in isolation,” Freeman told Bloomberg BNA.

‘Big Brother System.’

Domino’s allegedly required all franchisee establishments to use the PULSE system and knew that the technology was undercalculating wage rates, but stalled and delayed notifying its franchisees about the problem of “wage theft” this created, Freeman said. “That’s a damning piece of evidence in this context.”

The system also purportedly allows the franchiser to generate payroll reports, perform point-of-sale functions, maintain store data for evaluation purposes and track pizza delivery information as well as the time it takes employees to complete certain tasks.

The allegations concerning PULSE as well as others, such as Domino’s requiring franchisees to use an 800-page handbook, create “a pretty straightforward case of joint employment,” Freeman said.

“When viewed in context, the computer technology at the heart of Domino’s franchising system is a big brother system that gives the franchiser an Orwellian level of oversight and information that it uses to control core workplace terms and conditions at franchise establishments,” he said. It’s “pretty clear that the economic reality for workers at Domino’s franchisee outlets is that they have two bosses telling them what to do and what they can earn.”

Allegations Are ‘Easy’ and on the Rise

Lotito, not specifically addressing either the McDonald’s or the Domino’s cases, noted that allegations in any lawsuit are “cheap.”

“Allegations are easy to make,” he said. “But the bad news is, these types of allegations are being made more and more.”

But if these types of joint employment claims survive motions to dismiss, let alone motions for summary judgment, franchisers will face difficult decisions on how to deal with liability, he said.

Possible Effects for Other Employment Laws

For Liebman, the framework the NLRB uses in ruling in favor of or against McDonald’s would be binding in future board cases addressing franchise issues.

It would have no precedential value for federal courts analyzing joint employment cases under other laws. But it could serve as guidance, Liebman said.

The joint employment tests used in wage cases are broader than the NLRA’s standard, while tests under federal anti-discrimination laws, such as Title VII of the 1964 Civil Rights Act, are more akin to the NLRA’s framework.

The Equal Employment Opportunity Commission, which enforces Title VII and similar anti-bias laws, recently revised its strategic enforcement plan to include joint employer issues.

“One might say, if you can find joint employment under the NLRA, you could probably find it under any other law, which would be at least as broad as the NLRA or maybe broader,” Liebman said.

Still, joint employment analyses under any law will turn on the specific facts of each particular case and whatever factors the reviewing courts deem relevant, the observers said.

“That’s why these cases are so difficult,” Eisenberg said.

Franchisers Can Take Steps Now

The NLRB and courts have yet to rule on joint employment in the franchising context, but franchisers can take steps now to potentially limit their liability, at least when it comes to technology.

Franchisers can consider not imposing the use of certain technology and instead make it clear that franchisees are under no obligation to use any one system, Lotito said.

They can also ask trade associations to make arrangements for reduced pricing on technology systems for franchisees to consider, he said.

Additionally, he said, franchisers should review and perhaps modify any language in their franchising agreements that “suggests they have direct or indirect control” over the terms and conditions of employment for franchisee workers.

To contact the reporter on this story: Jay-Anne B. Casuga in Washington at jcasuga@bna.com

To contact the editors responsible for this story: Peggy Aulino at maulino@bna.com; Terence Hyland at thyland@bna.com

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