THE LAW: Are you at risk of being a joint employer?

In joint employment, there is a direct employer and a secondary business.

The direct employer hires and pays the workers. An example would be your local McDonald’s Corporation franchise operator or a staffing agency.

The secondary business does not hire or pay the workers, but benefits from them. The secondary business could be the parent McDonald’s Corp. (as the franchiser) or companies that retain staffing agency employees to perform labor.

This is the potential joint employment scenario, which is lawful, and only becomes a problem in some circumstances. Examples: when the direct employer fails to fulfill its legal obligation to pay wages or payroll taxes, or some enterprising plaintiff’s lawyer takes a “shotgun” approach and sues multiple defendants, including both the direct employer and secondary business.

McDonald’s lawsuit

In 2019, McDonald’s Corp. agreed to pay $3.75 million to settle a lawsuit claiming it was liable for labor law violations by one of its California franchisees.

This is believed to be the first time McDonald’s has settled legal claims by a group of workers at one of its franchises, although there was no concession by McDonald’s that it was a joint employer. The lawsuit was brought by 800 employees in five California restaurants owned by a single franchisee.

The settlement also came at a time when McDonald’s Corp. was facing another battle before the National Labor Relations Board on whether it was a “joint employer” of workers at its franchises, which would mean it had to bargain with workers who unionize.

Unions claimed McDonald’s should be liable for its franchisees’ workers because its computer systems monitor franchisee sales and labor costs and limit the ability of a franchisee to raise wages. McDonald’s Corp. argued it was not a “joint employer” of franchise workers.

The 2022 settlement with the NLRB absolved the corporation of any joint liability and was approved by the D.C. Circuit Court of Appeals. The NLRB is currently examining its policy on joint employers.

Temp employees

Many companies use contract and temporary employees to avoid staffing buildups and layoffs and lower the cost of administering a workforce.

The construction industry, for example, has historically used subcontractors. In addition, the use of subcontractors in recent years has spread to the trucking, health care, and high-tech industries.

For example, many businesses regularly subcontract their laundry, maintenance and housekeeping functions to a third-party. And, some businesses, like Uber, build their entire business models on subcontractors.

No matter how carefully drafted, virtually every contract retains some “indirect” control over the terms and conditions of employment, especially for pricing, quality control and branding.

Review contracts

Businesses would be wise to review their contracts and relationships with employment agencies and other companies to determine the extent that they possess some authority to control, directly or indirectly, the terms and conditions of the other companies’ employees.

Even if a court or agency finds two companies to be joint employers, a carefully drafted contract could place the legal risk on the direct employer.

The agreement should clearly define each company’s responsibilities and provide for indemnification if those responsibilities are not fulfilled.

Make sure the contract has provisions allowing prevailing party attorneys' fees and a jury waiver in case of disputes.

Wilford H. Stone is a lawyer with Lynch Dallas in Cedar Rapids. Comments: (319) 365-9101; wstone@lynchdallas.com