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NLRB Turns Government Into Kafka's Nightmare

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NLRB Turns Government Into Kafka's Nightmare

December 23, 2014

This article originally appeared in RealClearMarkets

In The Trial, written a century ago in 1914, Franz Kafka paints a portrait of an unimaginably oppressive government with secret laws and trials in which the individual is crushed. Today, in 2014, Kafka would not have to invent these circumstances. He could find them in real life, at the National Labor Relations Board. It’s up to the 114th Congress to keep the NLRB in check.

On Friday, just before the holidays, NLRB General Counsel Richard Griffin announced that he had issued complaints against McDonald’s franchised restaurants and McDonald’s USA, the parent corporation, as joint employers.  Workers complained that they were unfairly disciplined in retaliation for communicating with unions, including facing threats, fewer work hours, and job loss. 

In July Griffin stated (without offering a legal argument) that McDonald’s USA was a joint employer of those workers who are employed by local McDonald’s franchises, but he waited until last week to bring charges against the parent company. Before his appointment as general counsel, Griffin was one of the unconstitutional recess appointees to the NLRB, whose appointment was overturned by the Supreme Court. 

This decision to charge both the McDonald’s franchise and the parent company with these violations overturns decades of precedent.  For half a century, the local franchise was considered the only employer. The NLRB defined employers as those who controlled workers’ “essential terms of employment,” namely hiring, wage rates, firing, and job description. The franchises were the employers, not the owner of the franchise.  

When I called the NLRB to ask whether I could see the Advice Memorandum discussing the legal foundation for the change, I was told by an anonymous spokesman that “the memorandum is not available publically because it’s part of the litigation process.” The arguments in the Advice Memorandum—but not the Memorandum itself—will be available when the case goes before regional administrative judges in the spring, I was informed.

So the NLRB unilaterally changes the law without any notice or public comment, uses the change in the law to sue a major corporation, and tells the general public that the legal reasoning behind the change cannot be revealed. That’s Kafkaesque. And this from a president who stated in a memorandum on January 21, 2009, that “My Administration is committed to creating an unprecedented level of openness in Government.”

If the NLRB is making such a change, surely the public has a right to know the legal reasoning. The new definition could affect a wide swath of franchised businesses, ranging from Dunkin Donuts to Jiffy Lube to H&R Block.

Michael Lotito, co-chair of Littler's Workplace Policy Institute, told me, “This is not about winning a case.  It's about the destruction of a business model that is an engine for job creation and fulfilling the American Dream. “ 

The NLRB’s decision is indeed cataclysmic for America’s system of franchise business.  If the parent company is considered a joint employer, and sets terms of hiring, then the value of a franchise business is reduced. People with complaints can sue McDonald’s USA, not just their local franchise. A single employer franchise may not be worth suing.  But if the franchisor is a joint employer, such as McDonald’s USA, with a value of $100 billion, then every local franchise is worth suing. 

The NLRB is changing the definition of an employer to make it easier for unions to organize fast food workplaces. On June 26, Griffin stated in an amicus brief in another case, Browning-Ferris, that “the Board should abandon its existing joint-employer standard because it undermines the fundamental policy of the Act to encourage stable and meaningful collective bargaining.”  He believes that the NLRB’s new standard will promote collective bargaining and unionization.  

Unions such as the Service Employees International Union, who organized strikes at fast food establishments earlier this month demanding a $15 hourly wage, want McDonald’s USA to sign agreements saying that the company will not fight unionization measures at its restaurants. Companies would agree to recognize the union if a certain number of authorization cards are collected, rather than holding a secret ballot election. 

The SEIU wants to organize McDonald’s and other fast food chains because of the high rate of turnover in the fast food industry.  With turnover at McDonald’s around 157 percent annually, then in one year an average of three people fill every position. If the position is unionized, that adds up to three sets of initiation fees, generally around $50 each to $100 each, or $300 a year, on top of union dues that total 2 percent of paychecks. According to my calculations, unions stand to gain about $155 million each year from unionizing half of McDonald's workforce, $45 million of that from initiation fees alone. 

Such potential revenues are important to the SEIU because membership has declined since 2011. It now stands at 1.9 million, the same level as 2009. SEIU membership has slipped by 3 percent since 2011, even though the labor force has grown 2 percent over the same time.

Franchisors sign 10- or 20-year contracts with franchisees, and the joint employer designation has the potential to overturn millions of these contracts.  With its designation, the NLRB is potentially upending agreements that have years to run. Systematic disruption of these contracts would be unparalleled.

The franchise model is popular because it is the easiest way to launch a small business. Franchise businesses employ over 8 million workers. Entrepreneurs are less likely to want to buy a franchise if they are required to have unionized labor and if they do not have control over all the working conditions. And no company is going to want to sell franchises if they are going to be liable. One reason that companies sell franchises is to reduce liability.

The NLRB stated in last week’s release that “of 291 charges filed since November 2012, 86 cases have been found meritorious, and therefore, complaints would issue regarding those meritorious cases, absent settlement.” This means that comparatively few McDonald’s franchises have even allegations of unfair labor practices. This number represents about half of one percent of all U.S. McDonald's 14,000 locations. 

Without clarity in the law, many charges are going to be filed against franchisors, and these cases will wend their way over the next 5 years towards the Supreme Court, with different decisions by different circuit courts. Small business should not have to be handicapped by such uncertainty.

Congress can stop the NLRB’s raid on American business by passing a bill that states clearly what it means to be an employer and sending it to the president for his signature. 

If the president vetoes the bill, the House and Senate Appropriations Committees have the power of the purse. First, they can withdraw funding from the NLRB if it alters the definition of joint employer from what it was on January 1, 2014.  Second, they can state that no funds shall be used to litigate any matter relating to the joint employer status. Third, they can specify that no funds should be used for any NLRB purpose until such time as the General Counsel’s office publically releases all Advice Memoranda regarding joint employers.

The NLRB is trying to turn our government into Kafka’s nightmare with secret and unknowable rules and procedures aimed at destroying individuals and firms.  The NLRB must be stopped. Congress has the power to do just that.


Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. You can follow her on Twitter here.

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