Just like the horrendous Toddlers & Tiaras stage moms who live vicariously through their kids by pushing them into the hyper-competitive world of child pageants, trial lawyers are ensnaring deep-pocketed corporations for alleged violations committed by their franchisees.
Attempting to broaden the concept of "vicarious liability" to capture McDonald's (NYSE:MCD) in their net, trial lawyers want to hold the restaurant operator responsible for actions its franchisees took in California, New York, and elsewhere where they supposedly had employees work off the clock, denied overtime pay, had them pay for their own uniforms in violation of state law, and committed other instances of "wage theft."
The lawyers want the suit to drag McDonald's into the case, because the fast-food chain requires its franchisees to use labor-scheduling software that provides them real-time notification of labor costs. Since franchisees allegedly misused a required tool, the trial lawyers say the franchisor is responsible, but courts usually base their rulings on the day-to-day control the franchisor exerts over the franchisee, and it seems to this layman that the chain should escape having vicarious liability attached to it.
While McDonald's does prescribe the scheduling software, there's nothing to indicate that it tells its franchisees to underpay or not pay its employees for work performed. Courts have traditionally recognized that there needs to be some uniformity of rules dictated from on high to ensure, for example, that the McDonald's we walk into in New York has the same feel as one we walk into in Texas, but the franchisees still own and operate their businesses and are intended to do so as independent parties.
Burger King Worldwide (NYSE:BKW), for example, was found not vicariously liable for a slip-and-fall lawsuit at one of its franchised restaurants even though the franchise manual spells out that sidewalks and parking lots should be cleared of ice and snow. Because it wasn't so detailed as to direct the manner in which it should be cleared, leaving that up to the discretion of the restaurant, the burger joint was not held responsible.
Domino's Pizza (NYSE:DPZ), on the other hand, was found to be vicariously liable for a car accident caused by one of its franchisee's drivers because the court said the pizzeria's franchise manual was a "veritable bible for overseeing a Domino's operation" that left nothing to chance. It was deemed responsible for the accident and is why Domino's no longer guarantees that its pizzas will be delivered in 30 minutes or less.
In perhaps the most infamous case of vicarious liability, McDonald's itself was held liable when Stella Liebeck spilled a cup of hot coffee in her lap and suffered third-degree burns because it dictated to the franchisees how hot the coffee should be served. A jury awarded Liebeck $2.86 million in costs and damages, though a judge significantly reduced the final amount to $640,000 and the two sides ultimately settled for under $600,000.
There's a reason cups of hot coffee come with warning labels that its contents are hot, that chainsaws advise against holding the wrong end, and that hair dryers recommend not using them while you sleep. Lawyers are nothing if not creative in trying to bend the law to extract settlements out of corporations, but the latest lawsuits seem to have just as much to do with the union-organizing efforts of Fast Food Forward, a union-backed activist group that's led more than 100 strikes at fast-food restaurants around the country last year to increase the minimum wage. It is responsible for shepherding some of McDonald's alleged "wage theft" victims to the trial lawyers.
Yet as such lawsuits proliferate and as activists agitate for imposing higher costs on companies, all they'll succeed in doing is make employees more expensive to hire. Whether through fewer workers, shorter hours, or higher prices, employers will become creative in passing along the increased costs, and it will be the workers themselves who will be left vicariously experiencing what it feels like to bring home a paycheck as their jobs are eliminated because it no longer makes economic sense to hire them.
Taking the bull by the horns
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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's and owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.