Will Fast Food Companies Finally Be Liable for Unfair Labor Practices? [e107]

October 20, 2014

Nasir and Matt talk about the possibility of a law being changed to make franchisors liable for unfair labor practices. They also answer, “I am the sole managing member of a Delaware based LLC. Recently, I was engaged by a company to do consulting work. They requested that I fill out a Federal Form W-9. According to the instructions in the form, my single member LLC is considered a “disregarded entity” and the W-9 instructions instructed that I should use my social security number as the Taxpayer ID number instead of my FEIN. Does this mean that the payments will be considered direct to me and not through my business? Am I losing any of the “limited liability” benefits of the LLC this way?”

Full Podcast Transcript

NASIR: All right. Welcome to our podcast where we cover business in the news and answer some of your business legal questions that you, the listener, can send in to ask@legallysoundsmartbusiness.com. Welcome to the program and my name is Nasir Pasha.

MATT: And I’m Matt Staub.

NASIR: Matt Staub welcoming a new beard, actually. So, we’re going to have to change our podcast logo. Thanks a lot.

MATT: Oh, there’s a decent chance that, by the time this comes out, I will have shaved it because I’m already sick of it so we’re, like, right in that danger zone where I can’t handle it anymore. It happens, like, once or twice a year so it’s usually around this time of year because I just actually had lunch with someone this week who, the last time I saw, the exact same thing was happening. So, as far as he knows, I just have a terrible beard year-round.

NASIR: Year-round, yeah. No, I think what we’ll do is we’ll change the logo and you’ll just have to match what the logo is. We’ll have fun with it.

MATT: Yeah, that’s fun.

NASIR: I’ll change it up every once in a while. I’ll make it a half-beard on half your face and see how you respond.

MATT: Uh, it wouldn’t be the first time I’ve done that, actually.

NASIR: Okay.

MATT: I had a half-beard once, just to mess with people, and some people didn’t even notice. It was kind of, you would think, but…

NASIR: Oh, yeah, it takes a while for you to grow it in but I remember a TA back in college had a neck beard and what was funny is that my roommate and I were like, “Man, wouldn’t it be funny if we just grew neck beards?” and, like, a month later, literally, our TA had just a beard on their neck and shaved everywhere else – very strange. It was thick, too. Like, he’d probably be growing it for a few months, at least.

MATT: Some people like it.

NASIR: That was astronomy.

MATT: Sounds like astronomy.

NASIR: Yeah, astronomical.

MATT: Well, to kick off the week, we have a story, I guess it deals with fast food companies. The focus is a little bit on McDonald’s but it’s probably just because they’re the leader in this, I would think, in terms of number of employees. So, McDonald’s, Burger King, Taco Bell, and a bunch of other fast food companies are actually franchises and so there’s this law that’s been in place, I think it’s about thirty years old now, it was a case, a legal ruling that basically said that, you know, these bigger companies – McDonald’s, Burger King, Taco Bell, et cetera – can’t be liable basically for unfair employment practices, (00:02:29 unclear) of workers of the companies if it’s not directly in-charge of hiring and firing. Like I said, it’s all done through the franchisees and then you have the companies overrunning everything. So, I think they’re looking to change this, this would be a big change. I think it would be – well, I don’t want to give my opinion yet, I haven’t decided how I want to go on this – I was going to say it’s a good thing but I could see it being a bad thing, too.

NASIR: Are you holding it for suspense?

MATT: No, I’m holding it because I don’t know which way I’m going to lean on this because it’s definitely a good thing in terms of the employees but, at the same time, first of all, I don’t even go to fast food places so it’s not really going to affect me at all from a personal level.

NASIR: I think I have a specific opinion what it should be and I have a feeling that it’s very likely that I could be right on this but we’ll have to see. So, let’s understand the concept here. When you have a franchise – a franchisor and a franchisee – the franchisor is allowed to maintain a certain dominion of control over their franchisee because that’s the whole nature of a franchise relationship whereas, versus – you know, just to compare a license relationship where you license out the name, like CrossFit, for example is a license brand – in that case, they can’t really impose much control. But, in a McDonald’s franchisee, they set certain policies – everything from how food is made and so forth. So, the National Labor Relations Board actually is saying, “Okay. Well, if this franchisor is putting all this control over this franchisee and their policies may affect the actual employment issues, then shouldn’t they bear some responsibility?” Right now, the law – like Matt very well mentioned – if the franchisor is involved in firing and hiring then, okay, there’s liability there. But I think it should be expanded to where the franchisor is setting up certain policies and procedures that may lead to labor law violations. Those types of things should extend the liability to the franchisor because the franchisee is unable to do that. Now, what’s interesting about this is, even if the law does change, the franchisor could easily just change their franchise agreement to say that the franchisee should indemnify them for any labor law violations that may incur due to the actions of the franchisee, right? And, all of a sudden, that’s done – unless they prohibit that kind of indemnification. But, depending upon the type of control and how much, there should be some culpability there.

MATT: Yeah. I mean, if you just look at someone like McDonald’s, it’s difficult for the executive upper management of the entire company to – I don’t know how many locations McDonald’s has, I know it’s a ton.

NASIR: Like, five.

MATT: Yeah.

NASIR: I think there’s five.

MATT: Five or six.

NASIR: There’s one by my place and I know in San Diego I’ve seen two.

MATT: At least.

NASIR: So, let’s just round up.

MATT: At least three, yeah.

NASIR: But we have to give them some credit. They have to have more than three.

MATT: Yeah. So, I mean it’s just – and I’m sure they have an insane amount of turnover – it would be so difficult to monitor all these individual. You have to have these franchisees monitoring all the workers because the company, as a whole, can’t do it. It’s just not feasible. I don’t even know how many people they’d have to employ just to run the HR department.

NASIR: That’s true. I mean, it’s easy to pick on McDonald’s, but what about the smaller franchisors that may not have five locations? They have, like, three locations – much less than McDonald’s, right? And so, that kind of liability may have a bigger impact. But, of course, again, from a legislator’s perspective – or I should say, in this case, a department head perspective – this is a very easy money-grab for them because they’re going after big pockets. If they had the law on their side, they’re more likely to be able to settle with McDonald’s franchisor than a franchisee that one lawsuit could literally close their business, you know? So, I just think it’s a money-grab to me.

MATT: Yeah. I mean, obviously, it’s a lot different between, you know, a company like McDonald’s and the smaller ones.

NASIR: Yeah, but don’t get me wrong; I’m not saying this is bad law too because I think, if it does change, McDonald’s already imposes another franchisors, everything from procedures on opening and closing the store or the payroll systems and all that. They have quite a bit of input on how that works and that can all impact wage and labor violations.

MATT: Was it your idea who wanted to replace all workers with robots? Or am I making that up?

NASIR: Yeah, that was… No, that was my idea. I haven’t found any investors yet. Still looking. I don’t really have anything to sell. I just want to mess with robots.

MATT: All right. Well, I guess we’ll pay attention to that and see what happens. I mean, I think this will be a national story that we’ll hear about.

NASIR: Yeah, once it comes out.

MATT: All right. Question of the day, a long one – my favorite. Okay. Here we are.
“I am the sole managing member of a Delaware based LLC. Recently, I was engaged by a company to do consulting work but they requested that I fill out a federal form W9. According to the instructions in the form, my single member LLC is considered a disregarded entity and the W9 instructed that I should use my social security number as the tax ID number instead of my FEIN. Does this mean that the payments will be considered direct to me and not through my business? Am I losing any of the limited liability benefits of the LLC this way?”
What this person is asking is… I guess there’s two questions. “Does it mean that the payments will be considered direct to me and not through my business?” and “Am I losing the limited liability benefits of the LLC by doing this?”

NASIR: Also, whether they should follow the instructions which I guess that’s obvious.

MATT: Yeah, I would say right off the bat, tax advice – this isn’t advice but – a good thing if you have the ability to sit through it, the patience, probably the best thing to start off a lot of tax questions is just reading the instructions because there’s instructions for every single form that’s out there. It’s just pretty tedious. They usually have the answers in there. If not, you have to do a little bit of digging. But most people just don’t even want to look at that and I don’t blame them because it’s pretty brutal.
So, yeah, I mean, the instructions do say – I’m looking at the W9 form now – a single member LLC is a disregarded entity like this person stated so, you know, it says use the social security number.

NASIR: Unless you’ve done some kind of designation as a C corp – or even an S corp designation – for your LLC, then I think the default is that you’re a disregarded entity for a single member. I think they want your social because you’re going to end up filing all your income under your personal income anyway for this so that’s how they’re going to keep track as W9 purposes.

MATT: Yeah.

NASIR: Really, the only reason you need EIN for a single member LLC is if you have employees or you file excised tax returns which is not very common for most people so the EIN is not even necessary.

MATT: Or if you file a return for alcohol, tobacco, and firearms – also a consideration for when you need EIN. But, yeah, I mean, for the limited liability side of it, I mean, you’re still going to be doing business. You’re not doing business individually. You’re doing it as your LLC so I wouldn’t be concerned about that.

NASIR: No, exactly. How it’s taxed – and this is always kind of confusing too, especially with S corps, right? The S corp designation because people think, okay, “S corp, Should I file as an S corp?” When you create a new entity, you’re not creating an S corp entity. You’re creating a corporation and you’re doing an S corp election or you create an LLC and you do an S corp election. That can get kind of confusing, especially when you add the benefit corporation aspect to it because even that, like, you’re still filing as a corporation but as a benefit corporation with your state and then that benefit corporation could be file an S corp election. So, is it a B corp or an S corp? It is kind of confusing. But how it’s taxed is different than the legal entity itself.

MATT: Yeah.

NASIR: And so, don’t worry about losing your liability based upon how you’re taxed. You know, you can be taxed as a partnership, you can be taxed as a corporation but still have the entity.

MATT: Yeah, and the thing with the phrase “disregarded entity” is it’s usually just followed by the words “for tax purposes” because the IRS didn’t create a new tax classification of an LLC. LLCs are a state thing so basically the IRS views it as one of three things – corporation, partnership, or disregarded entity.

NASIR: Yeah, and a disregarded entity is basically a sole proprietorship. It’s taxed the same way.

MATT: Yeah. As an LLC, you can choose to be taxed differently if you so choose.

NASIR: If you so choose!

MATT: Yeah, but we won’t get into the analysis of that because no one wants to listen to it and, quite frankly, I don’t want to talk about it.

NASIR: Okay. So, I think we answered the question. I mean, they did ask, “Does this mean that the payments will be considered direct to me and not through my business?” Like discussed, unless you’ve done some other designation of how you’re taxed, the payments for tax purposes are being made to you.

MATT: Yeah, if you look at the top, it’s still filling out your business name and checking the box that says LLC.

NASIR: Yeah, exactly.

MATT: I mean, the IRS, all they want to do is just track people getting income so this is their way to do it, like you said from the beginning.

NASIR: Very good. All right. Well, let’s not do a tax question for another year because I hate taxes.

MATT: Sounds good.

NASIR: All right. Thanks for joining us everyone.

MATT: And keep it sound and keep it smart.

Partnership Law Page


The Podcast Where Nasir Pasha and Matt Staub cover business in the news with their legal twist and answer business legal questions that you the listener can send it to info@legallysoundsmartbusiness.com.

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Legally Sound Smart Business

A business podcast with a legal twist

Legally Sound Smart Business is a podcast by Pasha Law PC covering different topics in business advice and news with a legal twist with attorneys Nasir Pasha and Matt Staub.
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