The NLRB vs. Small Business America

By SBE Council at 12 February, 2015, 10:41 pm

by Raymond J. Keating-

For many individuals, franchise ownership is the best path to entrepreneurship.

There certainly are advantages. A franchisee owns and operates a small business, while benefiting from the franchisor’s products/services, business model, reputation, brand, and support. And in fact, franchising is a strong, significant part of the entrepreneurial sector. According to Steve Caldeira, President & CEO, International Franchise Association, there are 780,000 locally-owned franchise businesses across the U.S. that directly provide 8.9 million jobs.

Unfortunately, President Obama’s National Labor Relations Board (NLRB) is moving to redefine the “joint employer” standard, thereby placing these local small businesses and the jobs they provide in peril. In fact, it’s been argued the NLRB’s action threatens every business.

The NLRB previously never considered franchisors and franchisees as joint employers. Indeed, the NLRB and the courts always have been quite clear that in order for two or more companies to be considered joint employers, each must exert significant control over the operation and supervision of an employee.

As noted by the just-formed Coalition to Save Local Businesses, of which SBE Council is a member, “The [NLRB’s] long-held standard deems businesses joint employers only when they share direct and immediate control over essential terms and conditions of employment, including hiring, firing, discipline, supervision, and direction. Marketing and advertising have nothing to do with employment practices… Local franchise business owners make nearly all of the business decisions of their stores or restaurants. They, and not the corporate brand, establish their own employment practices and policies. Local owners decide who to hire, what to pay, and employees’ work schedules. The success of the business is dependent on the local business owner’s understanding of the local marketplace and the needs of the community.”

This NLRB redefinition would drastically alter the franchisor/franchisee relationship, making franchisors liable for franchisee actions. The result of such a change should be obvious, i.e., lost franchising opportunities, lost small businesses, lost jobs and lower levels of new business creation. Indeed, as noted by a Coalition to Save Local Businesses blog post, “the NLRB wants to demote thousands of America’s entrepreneurs to assistant managers.”

So, why has the NLRB suddenly decided to try to alter long-established definitions and policies? Quite simply, they are doing the bidding of labor unions.

In a July 2014 report on charges brought against McDonald’s by the NLRB’s general counsel that the company could be held jointly liable for labor and wage violations by franchise operators, the New York Times noted, “Wilma Liebman, a former chairwoman of the National Labor Relations Board under President Obama and now an occasional consultant to unions, said the decision could give fast-food workers and labor unions leverage to get the company to negotiate about steps that would make it easier to organize McDonald’s restaurants.” Indeed, the objective here is to serve the interests of labor unions.

It is important to recall that in the private sector, labor unions have become largely irrelevant, with the percentage of private-sector wage and salary workers who are labor union members falling to a mere 6.6 percent in 2014, down, by the way, from 24.2 percent in 1973, for example. As they have lost ground in the marketplace, unions have turned to politics and government to advance their objectives.

As Alfredo Ortiz, President & CEO of the Job Creators Network summed up, “In the end this is about big government getting bigger and small business getting smaller.  Unfortunately, unelected bureaucrats at the National Labor Relations Board want to change the rules, hurting franchised businesses–and especially minority and women entrepreneurs.”

Looking ahead, if the NLRB is allowed to impose this redefinition, the threat to the franchising model, to entrepreneurs and to our economy would be real and significant. Karen Kerrigan, President & CEO of the Small Business & Entrepreneurship Council, explained, “Small, independently-owned businesses across the country have flourished because they are able to provide quality services at competitive prices thanks to local owners and managers who understand their community market and the needs of their customers.  Should the NLRB expand the definition of joint employer, they would strip local business owners of their independence to effectively manage their operations. This action will create a disincentive for entrepreneurial Americans to consider franchise business ownership. And those entrepreneurs building and perfecting innovative businesses with the goal of franchising will be harmed if the model is undermined. America needs more successful entrepreneurs, but the NLRB’s potential action will erect new barriers, which means fewer jobs and diminished economy activity.”

Fortunately, various members of Congress understand the threat. TheHill.com reported on February 11, “… the GOP is also taking a hard look at the NLRB’s joint employer standard, under which restaurant chains like McDonald’s are held responsible for labor violations committed by the management at individual franchises. Franchisors have traditionally been viewed as insulated from liability for such violations, and the prospect of increased exposure has congressional Republicans and industry groups up in arms. During last week’s hearing, [Sen. Lamar Alexander (R-Tenn.), chairman of the Senate labor committee] warned the joint employer standard would ‘destroy’ the franchise business model and hurt small businesses. ‘These franchise companies will find it much more practical to own all their stores and restaurants and daycare centers themselves,’ Alexander said during the hearing. ‘There will be many more company-owned outposts, rather than franchisee-owned small businesses.’” (Read a summary of the Senate hearing here.)

Indeed, it is imperative the Congress act to rein in another regulatory body careening out of control, and imposing new burdens and restraints that do serious harm to American small businesses and entrepreneurship.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. Keating’s new book published by SBE Council is titled Unleashing Small Business Through IP: Protecting Intellectual Property, Driving Entrepreneurship and it is available free on SBE Council’s website here.