United States: Would You Like Fries With That Lawsuit?

Last Updated: February 26 2015
Article by Christina A. Stoneburner

The big news in recent weeks is the lawsuit that was filed against McDonald's in the Western District of Virginia alleging discrimination. The reason this case is big news is because the plaintiffs did not just file against their employer, Soweva Co. a McDonald's franchisee, the Plaintiffs also directly sued McDonald's.

We have reported that the plaintiffs and agencies have been trying to expand the definition of "joint employer" under the National Labor Relations Act and the Fair Labor Standards Act. This lawsuit now tries to chart somewhat new territory under Title VII of the Civil Rights Act.

The concept of "joint employment" is not foreign to Title VII analysis. However, the way the plaintiffs are seeking to expand that analysis is what is putting the McDonald's case on everyone's radar.

Under Title VII, an "employer" can be liable for discrimination against its employees. Where a company has a complex corporate structure of subsidiaries under a parent, employees may sue both the subsidiary and the parent if they can prove that the two are one integrated enterprise. In general, all that a parent corporation needs to defeat a claim in such a case is to demonstrate that they do not control the subsidiary.

Circuits do differ as far as what test should be applied to determine if the parent and subsidiary are an integrated enterprise, but the Equal Employment Opportunities Commission has set forth in its Compliance Manual the 4 factor test that it believes determines whether two companies are integrated enterprises and which is designed to determine how much control an entity has over the operations of its subsidiaries. Specifically, the EEOC would look at:

  • The degree of interrelation between the operations, i.e., do they share management services, share office space and employees, etc.
  • The degree to which the entities share common management
  • Is there centralized control of labor relations, i.e., does one entity screen and hire candidates for the other, do they have a common handbook or policy and procedure manual, do they share a human resources department
  • The degree of common ownership or financial control over the entities

The control test can be tough for plaintiffs to satisfy if the parent does not have the right or does not in fact control the day-to-day employment decisions of the subsidiary.

Another form of joint employment arises when you have two unrelated companies, both of whom have some control over the employees' terms and conditions. The typical example, as recognized by the EEOC, occurs where there is a temporary agency who has placed an employee with a company. In that case, both entities have significant control over the employee; the temporary agency actually pays salary and can terminate the employee, while the company where the temporary employee works controls day-to-day work assignments and can issue discipline.

It is easy to understand why a temporary agency can be a joint employer with the company where the employee reports to work. It is not so easy to see how a franchisor can be a joint employer with its franchisee under existing guidance. This is because the franchisor does not neatly fit in the traditional definition of either integrated enterprises or joint employers.

A review of the complaint filed in Betts v. McDonald's indicates that the plaintiffs seem to be arguing both theories of joint liability. They set forth facts that, if true, might satisfy the integrated enterprises test as well as the joint employer test. The plaintiffs argue that McDonald's controls nearly all aspects of the operations process, but they also argue that McDonald's is involved in hiring decisions by its franchisees. The complaint specifically targets the franchise agreement which sets forth a lot of control over operations.

Now, I have not read the franchise agreement, but suspect that it is typical of a lot of franchise agreements in that it may specify operational procedures that must be followed, such as who are approved vendors, what advertising may be done, menu items, and recipes. In short, provisions that are necessary to insure a consistent restaurant experience between different locations. Nothing in these provisions would conclusively prove that the franchisor is a "joint employer."

Where the Plaintiffs might get some traction are the allegations that McDonald's sets forth a harassment policy for all of its franchisees, provides management training, encourages employees who believe they have been discriminated against to report claims to McDonald's, and the specific allegation that these plaintiffs (or at least some of them) complained to McDonald's about the alleged harassment. Of course, we have no knowledge of whether any of the allegations are true; it's just that this type of control might be sufficient to establish that McDonald's is a joint employer for Title VII purposes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Christina A. Stoneburner
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