Judge Rejects NLRB – McDonald's Settlement in 'Joint-Employer' Case

The latest chapter in the ongoing joint-employer case between McDonald's USA, LLC ("McDonald's) and the National Labor Relations Board (NLRB) was written on Tuesday, as an administrative law judge ("ALJ") rejected a proposed settlement between the parties. At issue in the case is whether McDonald's is a so-called joint employer of its franchisees' employees and thus liable for labor law violations by those franchisees.

By way of background, in December 2014, the NLRB issued 13 complaints against McDonald's, naming it as a joint employer for alleged unfair labor practices by several of its franchisees. Opening statements and witness testimony in the case commenced in March 2016. In March 2018, the NLRB and McDonald's moved for approval of settlement agreements; however, the ALJ by its July 17, 2018 Order, denied the motion.

The issuance of the 40+ page Order by ALJ Lauren Esposito, an Obama-era appointee, has been widely reported in media outlets, many characterizing it as a setback for McDonald's. However, it is instructive to ferret out why the ALJ rejected the settlement in determining any effect of the rejection in the ongoing joint-employer debate.

In rejecting the settlement, ALJ Esposito looked to NLRB policy and precedent for standards applicable in assessing such agreements. Although the analysis is multi-faceted, ALJ Esposito keyed on one factor as being among the most important – whether the settlement agreements provide a reasonable approximation of the relief sought, which in this case is a finding of joint-employer status. In particular, ALJ Esposito looked to the NLRB's decision in UMPC, in which the NLRB assessed the reasonableness of a settlement in a joint-employer context. In UMPC, the settlement agreement provided that the alleged joint employer, UMPC, would serve as a guarantor for its subsidiary's performance of the settlement terms and the NLRB decided that the proffered guaranty status satisfied the standard as a reasonable approximation of a finding of joint-employer status.

The proposed McDonald's settlement provided for posting and mailing of certain notices detailing the settlement, payment of back pay to certain franchisee employees and creation of a settlement fund to remedy certain future violations. The Order points out that McDonald's remedial obligations under the settlement were limited to mailing out certain follow-up "Special Notices" if a franchisee fails to remedy a default under the settlement agreements and collecting from franchisees and providing to NLRB offices the monies comprising the settlement fund. These "circumscribed" obligations, per the Order, "are not comparable in any way, shape or form to" the guaranty of performance that the NLRB found in UMPC to approximate joint and several liability.

It is clear from the record as quoted in the Order that McDonald's simply would not agree to a guaranty. McDonald's also unsuccessfully took the position that its franchise relationships were sufficiently different from the parent-subsidiary relationship in UMPC to make a guaranty inappropriate.

Given the apparent importance of a guaranty of performance to validate a settlement, and given McDonald's opposition to that requirement, one could conclude that, unless McDonald's does an about-face on this point, it's now unlikely that the McDonald's case will be resolved by settlement. Many commentators agree that the Order will instead be appealed to the NLRB, where Republicans now hold a 3-2 majority. In such event, whether the NLRB on appeal finds grounds to ameliorate or distinguish the guaranty requirement of UMPC with specific reference to the franchise relationship in McDonald's would certainly be of interest.

As we wrote last month, the NLRB announced that it intends to issue a Notice of Proposed Rulemaking clarifying the joint-employer standard “as soon as possible, but certainly by this summer.” Some observers have speculated that the NLRB's proposed settlement in the McDonald's litigation was an attempt to take that test case off the table to clear a path for such rulemaking to ensue. Absent settlement, an appeal of the Order to the NLRB may similarly detour any on-the-merits decision in McDonald's while the NLRB pursues the rulemaking option. Those seeking guidance on the joint employer standard in the franchise context thus remain in wait and see mode while the NLRB rulemaking proceeds and the McDonald's parties consider and pursue their next steps.