In two decisions issued in the last two weeks of August, the National Labor Relations Board (NLRB) has set the table to broadly expand the concept of joint employer status. The implications of expanding that concept have profound and troubling implications for the hotel industry.
Last December, the general counsel of the NLRB, which acts as a sort of prosecutor for labor law infractions, filed unfair labor practice charges against McDonald’s USA, LLC the franchising arm of the world’s largest hamburger chain. The charges followed three years and literally hundreds of complaints from unions, such as the SEIU, alleging that McDonald’s should be treated as a joint employer with its franchisees as the company defines in many respects the terms and conditions of employment. In a ruling issued on August 14, the NLRB rejected McDonald’s interlocutory appeal of the general counsel’s reclassification of McDonald’s as a putative joint employer with its franchisees.
Then on August 27, the NLRB handed down its long awaited decision in a case involving Browning-Ferris Industries. The Browning-Ferris case was about the outsourcing of non-core tasks to a subcontractor, but the joint employment issue was the same, that is whether Browning Ferris should be considered a joint employer with its subcontractor. In that decision, the Board reversed more than 30 years of precedent and declared that two or more otherwise unrelated entities may be joint employers under the NLRA based solely on whether each of them establishes or codetermines the essential terms and conditions of employment.
Prior to that ruling, the general rule was that in order to be found a joint employer, the entity alleged to be in that category had to both:
a) determine or influence the terms and conditions of employment; and
b) actually affect the employment arrangement in a meaningful way, such as engaging in discipline, supervision or direction of work activities.
Thus, the new ruling from the Board eliminates the need for the non-direct employer to actually affect how people work, concluding that it is enough if the non-direct employer establishes terms and conditions of employment. On the NLRB website there is a McDonald’s fact sheet that clearly suggests that ruling in Browning-Ferris will soon be at a franchise near you, stating in part:
“Our investigation found that McDonald’s USA, LLC through its franchise relationship and its use of tools, resources and technology, engages in sufficient control over its franchisees’ operations, beyond protection of the brand, to make it a putative joint employer with its franchisees, sharing liability for violations of our Act.”
Why do we care?
So why do we care, if we are not in either the hamburger or recycling businesses? Following are some areas in our daily operations that may be affected by these joint employer rulings:
1. Union organizing efforts: In our business, just like in the fast food business, unions have tended to shy away from attempting to organize individual franchise operations, because the effort required to organize a single property is time-consuming and expensive. The educational initiative undertaken by unions to get associates to agree to turn over a significant amount of their income in the form of union dues usually requires the extensive deployment of paid union staff members and the delivery of large amounts of written materials. Those are not free. If the organizing effort is for a very small property, like a 70-key select-service hotel, the number of employees that the union would gain by organizing would never pay enough in dues to offset the costs of the organizing campaign. If, on the other hand, the union could present signed cards to a major franchisor from 500 small hotels and demand the right to bargain with the franchisor as joint employer, the economics of organizing could easily get back in balance.
And there is some precedent for this type of negotiation. In 2012, the corporate office of Hilton negotiated a five-year national labor agreement for Hilton-managed hotels in major U.S. cities. That agreement quickly became the model for city-wide labor negotiations throughout the country, being widely hailed as a model of efficiency.
2. Card check neutrality: In a number of cities, major branded hotel companies have signed so-called card check neutrality agreements for hotels that they manage in those cities. Under a card check agreement the employer agrees that for any future hotel that the company owns or operates in the same city, the union will be recognized as the bargaining agent for the employees upon presentation of signed cards from 50% plus one members of the employee group indicating a willingness to be represented by the union. This eliminates the right of the employees to a secret ballot election. Most of the branded hotel companies are both operators and franchisors. If franchisors are joint employers, then in any city where as an operator the company signed a card check agreement, the union may argue that the joint employer’s card check agreement as an operator entitles the union to a card check deal at an otherwise non-union franchised hotel.
Again there is a related precedent for such a claim. Following the acquisition of Kimpton by InterContinental Hotel Group, in San Francisco, the hotel union has claimed the right to a card check neutrality agreement at the non-union Kimpton properties because IHG, the new parent, signed a city-wide card check agreement for hotels it manages in that city.
3. Outsourcing agreements: The Browning-Ferris case, as noted, was an outsourcing situation, in which BFI contracted with a subcontractor to provide metal sorting and housekeeping services at a recycling facility. In the hotel business, the trend for the last few years has been to outsource services that are not core competencies of the hotel operator. For many years, we have outsourced night cleaning services. More recently, housekeeping, some accounting, valet parking, stewarding and other similar services have been outsourced to either vendors or third-party employers in many instances to get or keep the people doing that work off of salary and benefit rolls among other reasons. In every one of those outsourcing agreements, the hotel operator reserves the right to specify rules about uniforms, employee conduct, interaction with guests, access and egress points and other elements of how those jobs are to be performed. Under the NLRB’s ruling in Browning, the hotel operator who has the right to give such direction, even if he or she does not give that direction, could be found to be a joint employer and liable for the actions of the regular employer under the NLRA. The non-union third-party workforces of union hotels will be the most appealing targets under the BFI ruling.
4. Regulatory creep: Technically, the Browning-Ferris Industries ruling is limited to the jurisdiction of the NLRB, which covers labor relations under the National Labor Relations Act. However, the concept of joint employer is one that has been kicked around by a number of federal agencies, and the likelihood that other agencies will adopt the NLRB’s new test as their own is relatively high. Among those agencies are OSHA, the Department of Labor and EEOC. If a franchisor is a joint employer, and as such is responsible for the liabilities of its franchisees, then claims for unsafe working conditions, wage and hour violations, and for discrimination on any of the various protected categories will become the franchisor’s problems. All of these types of claims are generally compensable personal injuries as well as violations of statutes. Since, by and large, franchisors are much larger entities than their franchisees, and as a result, tend to have much deeper pockets, the plaintiff’s bar will be happy to add a whole new category of defendants who can pay judgements in personal injury cases.
The next issue will be how both franchisors and franchisees in our industry react to joint employer status. It is probably too early to tell but clearly some fundamental changes in the relationship will occur if the McDonald’s cases follow Browning-Ferris and the latter becomes the law. Franchisees have always been independent and often small business owners who accept direction and guidance from their franchisors but who value their ability to succeed or fail largely on their own initiative. But franchisors, faced with the potential of massive liabilities for matters like compensation, hiring practices, discrimination, etc., over which they have never had control, will either have to exert more control or insure against the potential of franchisee failures costing them money.
Neither of those alternatives is palatable. If franchisors elect to assert more control over operations, they will have to erect elaborate management and measurement systems to affect that control. Think of quality assurance programs on steroids. If, on the other hand, the franchisors decide to protect themselves from the franchisee’s joint employer liabilities, they will have to look beyond the current franchise agreement indemnities to the credit-worthiness of those indemnities. Most likely, the personal guarantee provisions of the franchise relationship will be expanded to cover these issues with a significant minimum net worth test associated with that guarantee.
Whether we like it or not, our industry has a horse in this race. As further developments unfold, either the issuance of the McDonald’s decision or a court challenge to the Browning-Ferris decision occasioned by the organizing of the outsourcer’s workers and BFI’s failure to negotiate, we will all need to carefully consider the implications of what could be a major sea change.
Peter D. Connolly, executive VP of operations and development for Hostmark Hospitality Group, has had a distinguished career in a variety of legal and business roles with prestigious travel and hospitality organizations. He was of counsel to Jeffer, Mangel, Butler & Marmaro in its global hospitality practice, where he designed and documented hotel financial structures, including hotel condominium and traditional hotel structures, and negotiated management agreements, hotel purchase and hotel finance agreements on behalf of various developer and management company clients. From 1982 to 2000, Connolly was with the Hyatt organization as general counsel, where he was responsible for hotel operating legal issues, acquisitions, divestitures, financings, management arrangements and owner relationships. In 1996 and 1997, Connolly ran Hyatt’s development department, and was responsible for the acquisition and/or development of a number of Hyatt properties. Connolly retired from Hyatt in 2000 as Senior Vice President, General Counsel and Chief Information Officer of the company. He is a member of the bars of Illinois, the District of Columbia, the United States Court of Appeals for the D.C. Circuit and the United States Supreme Court. He is a graduate of Providence College and Catholic University Law School.
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