For decades the Department of Labor and the National Labor Relations Board interpreted a firm to be an employer if it exercised “direct and immediate” control over its workforce. However, in the past few years, these agencies have expanded the definition to allow parent firms of franchises to be employers of groups of franchised workers, causing confusion, higher employment costs, and potential increases in lawsuits.
On Tuesday the House of Representatives will vote on a new bill, known as the Save Local Business Act (H.R. 3441), introduced by Representative Bradley Byrne (R-AL). The purpose of the bill is to roll back the changes and to make it easier for employers to hire workers. The bill seeks a return to the prior standard, that to be an employer, a firm must have an “actual, direct, and immediate” control over employees.
To justify its changes, the NLRB reasoned that the standard of joint employer should be expanded to fit changing economic conditions, which includes “growth in contingent employment relationships.” The 2015 Browning-Ferris ruling blurred the lines of the meaning of joint employer because it set the standard that companies sharing “indirect” or “potential” control over another’s workforce could be considered a joint employer.
The broadening of the definition leads to confusion as to which employer is responsible for the daily operations of a business. A key example of this would be between a small business franchise and the franchise parent company.
In January 2016, the Department of Labor Wage and Hour Division’s Administrator’s Interpretation called for the meaning of joint employer to be “as broad as possible.” It also stated that the rule should target third-party management companies, independent contractors, and staffing agencies to name a few. In 2017, Secretary of Labor Alexander Acosta withdrew this interpretation.
A broader definition of joint employer has negative consequences for workers, entrepreneurs, and local employers. Franchise companies, which employ 7 percent of private sector workers, would be negatively affected because the expanded definition would make the parent franchisor company a joint employer of the franchisee. This would increase the franchisor’s responsibility over franchisees and increase liability regarding collective bargaining.
As a result, parent companies are more likely to exert greater control over the operation of the smaller franchises. This would hurt small business owners because greater control from the parent company would reduce the freedom they have in the operation of their businesses.
In addition, placing greater responsibility on the parent company over the various franchises would add to the daily operations of the parent company, increasing administrative costs. These costs would be passed on to the franchisee and ultimately to consumers and to workers. It would also reduce the number of franchises parent companies have. The American Action Forum estimates that 1.7 million jobs could be lost.
Finally, the broader rule would likely discourage large companies from working and contracting with smaller companies because the large company may be considered responsible for the daily operations of the small company. As previously mentioned, greater responsibility would raise the daily operation costs of the larger companies, which would decrease the probability of companies entering into these contracts.
Opponents of the bill, such as the Center for American Progress, argue that it would enable corporations to escape liability by placing some responsibilities solely on their smaller enterprises. Additionally, it allows larger corporations to outsource their workforce to smaller subcontractors who may be cheated out of fair wages. The Center for American Progress believes that the rules put in place by the Obama administration were bettering workers by allowing them a greater ability to unionize and to bargain. However, as aforementioned, these rules place greater costs and pressures on large corporations, likely resulting in fewer contracts. Fewer contracts mean fewer workers with jobs.
The Save Local Business Act will increase job creation and improve job stability because it will take away the convoluted joint employer scheme and simplify the definition of employer. Additionally, the new law would eliminate future overreach by unelected bureaucrats, i.e. NLRB and Department of Labor, which will protect workers and employers.
Emily Top is a research associate at Economics21.
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