DC Bureaucrats Upend Franchise Businesses
Under a National Labor Relations Board decision released on Thursday, the Board has dramatically expanded the numbers of “joint employers” in America. Now, employees of franchised business such as Burger King may be classified as employees of the parent company. Employees of subcontractors, such as office cleaners, may be classified as employees of the company that hires the subcontractor.
With its decision, the Board overturned a prior ruling by its regional director that employees of Leadpoint were not joint employees of Browning Ferris, a recycling plant that subcontracted operations to Leadpoint. Subcontractors and franchisees across the country had better watch out for more lawsuits and higher costs of doing business.
Last week, speaking at the Detroit Economic Club, Republican presidential candidate Senator Marco Rubio said, “The National Labor Relations Board is on the verge of declaring that David doesn’t even own his business, that he is a ‘joint employer’ with his franchisor. The likely impact is that fewer franchises will open, and costs and litigation will increase for existing ones.”
Before this decision, if a firm did not exercise authority over the employees of its subcontractors then it was not counted as an employer. Now the NLRB is saying that if a firm just possesses the authority to control its subcontractor’s employees—even if it does not use this authority—then it is a joint employer.
The implications of this decision are immense. Millions of franchises are at risk of being told that they are joint employers with parent companies such as Jiffy Lube, Dunkin Donuts, or H & R Block. Millions of subcontractors may find that the company that is employing them has morphed into a boss. This raises the costs of doing business, encouraging companies to reorganize or go offshore.
The Board notes, disapprovingly, that “the diversity of workplace arrangements in today’s economy has significantly expanded. The procurement of employees through staffing and subcontracting arrangements, or contingent employment, has increased steadily…”
What the Board fails to note is that franchises and subcontractors have come about as the most efficient way of providing particular services. Franchises make it easier for people to start their own businesses, and independent contractors can move from one employer to another at will, or work for multiple employers at one time.
The Board’s ruling follows guidelines from the Labor Department on when to classify workers as employees, who are entitled to fringe benefits, or independent contractors, who are not. These guidelines, which became effective in July, attempt to make it more difficult for employers to hire independent contractors. In June the Labor Department issued new proposed expanded overtime revisions that would reduce workplace flexibility for millions more workers by prohibiting time off in exchange for extra time on the job.
With the new Labor Department rulings and the National Labor Relations Board decisions, President Obama wants to move America back to the mid-20th century when people worked for one employer for most of their lives and independent contractors were less common. The sharing economy, with Uber and Airbnb, were unimaginable.
One result of the new 21st century economy is that unionization levels have decreased. People don’t want to pay union dues and initiation fees.With the share of wage and salary workers who belong to unions declining from 20 percent in 1983 to 11 percent in 2014, unions are feeling the pinch. They lack dues to pay salaries for union bosses and give political contributions to political parties, practically all Democrats. That is why the Board is trying to make it easier for unions to coerce workers into joining. It is far easier for a union to organize one large workplace than several small ones.
Unions are particularly interested in the fast food industry because of its rapid turnover. On average three people per year occupy one slot at a fast food restaurant. People come for a short period of time, such as the summer, then leave. Someone else might start in the fall. If each of these three people had to join a union, the union would get three sets of initiation fees per year. With fees at about $50 per person, that is $150 annually.
As federal and state governments have tried to expand the benefits that employers must provide, it has become more advantageous for small firms to form to avoid these mandates. Take the Affordable Care Act, for instance. Firms with more than 50 employees have to offer a certain level of health insurance or pay a penalty. Firms with fewer than 50 workers are often exempt from other mandates, too. Contracting out some operations keeps the size of the firm down, along with the costs of doing business. With the new rules, watch for more companies going offshore, and the share of Americans who are employed or looking for work declining further.
The franchise model has dramatically expanded the number of small businesses in America. Congress should place a clear definition of an employer and a subcontractor in the law. The NLRB’s decision is a travesty that Congress and the next president can and should reverse.
Diana Furchtgott-Roth, director of Economics21 at the Manhattan Institute, is the coauthor of "Disinherited: How Washington Is Betraying America's Young." Follow her on Twitter here.
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