NLRB Joint Employer Ruling Undermines Small Businesses and IP

By at 1 July, 2016, 8:25 am

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 by Raymond J. Keating-

On August 27 of last year, the National Labor Relations Board (NLRB) in the Browning-Ferris case decided to toss out the long-held definition of “joint employer,” and replace it with an expansive, vague view that threatens a wide array of small businesses, franchise operations, and other business models.

The NLRB previously never considered franchisors and franchisees as joint employers. Indeed, the NLRB and the courts always had 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, that is, direct and immediate control must exist over such matters as hiring, firing, discipline, supervision, and so on.

The Joint Employer Rule: Intrusive and Excessive

As for the NLRB ruling last summer, the Coalition to Save Local Businesses explained, “Under this new interpretation, the NLRB is … applying a broader ‘economic realities’ test to include not only direct control, but ‘indirect control’ or even ‘potential, unexercised control’… If the NLRB’s decision to broaden the joint employer definition is allowed to take root, it would expand franchisor responsibilities and make them more liable for franchisees’ actions. For non-franchise businesses, any business relationship could be susceptible to a joint employer finding.”

The Browning-Ferris case dealt with a staffing company, Leadpoint, and its employees working at a Browning-Ferris facility. The NLRB ruled the two companies were joint employers due to “indirect” and “potential” control of Leadpoint workers, which, in turn, would allow Leadpoint and Browning-Ferris workers to jointly form a union. The NLRB decision is being appealed to the U.S. Court of Appeals for the D.C. Circuit. The NLRB also is litigating against McDonald’s in another “joint employer” case.

This effort to expand the “joint employer” definition flies in the face of labor law going back nearly seventy years. As Trey Kovacs of the Competitive Enterprise Institute recently explained:

“In 1947, in response to a U.S. Supreme Court decision that broadened the meaning of an employer-employee relationship, Congress passed the Taft-Hartley amendments that reformed the National Labor Relations Act. Of the revisions to the NLRA, modifications to terms ‘employer’ and ‘employee’ were made so that direct and immediate control is what established an employment relationship, not ‘economic realities,’ or any other broader test than used under common law. Congress, in 1947, stressed that ‘direct supervision’ is required to establish an employment relationship. Further, Browning-Ferris argues that even the ‘Court’s analysis of employment relationships under the NLRA, which has emphasized the importance of direct and immediate control over key employment terms.’ It is easy to see how the new joint employer standard, which includes indirect control, is inconsistent with the NLRA and Taft-Hartley amendments.”

The Joint Employer Rule Undermines IP

For good measure, in terms of ignoring long-established law, the NLRB’s new, vague definition violates intellectual property (IP) protections established under the Federal Trade Commission (FTC) 27-year-old Franchise Rule, which is rooted in the 1946 Latham Act.

The FTC Franchise Rule effectively gives the franchisor significant control over and the ability to provide significant assistance in of terms of the franchisee’s method of operations given that the franchisee has obtained a right to operate the business identified and/or associated with the franchisor’s trademark. This right is rooted in the 1946 Latham Act, which strengthened federal trademark protection by establishing a cause of action allowing for greater protection of brand and quality control. In fact, in a 1986 case, the Second Circuit declared that “one of the most valuable and important protections afforded by the Latham Act is the right to control the quality of the goods manufactured and sold under the holder’s trademark.”

So, not only does the NLRB’s redefining of “joint employer” undermine franchising and other business models by potentially exposing franchisors and other companies to liability for employment and labor actions made by other enterprises – such as franchisees, subcontractors, staffing businesses, and suppliers – over which no direct control is exercised, but the decision also undermines the ability of businesses to protect their trademarks, thereby undermining the value of their intellectual property.

In the end, small businesses would bear the brunt of the costs of the NLRB’s abuse as franchisee and other opportunities will decline, and small business owners’ control over decision-making and operations will be weakened.

Regarding the NLRB decision, Small Business & Entrepreneurship Council (SBE Council) president & CEO Karen Kerrigan declared, “Obama Administration regulators are dead set on making the United States a hostile place to startup and build a business. The NLRB rule is a major impediment to risk-taking and opportunity for Americans. In today’s economy, entrepreneurs and small business owners need flexibility and autonomy to run their businesses, but the NLRB says government knows better. If your small business is a subcontractor, a franchise, or participates in a partnership, your business is under attack.”

But given the realities of today’s economy and the challenges faced by small businesses, why would the Obama regulators go down this path? That’s easy to answer. They are serving the interests of labor unions, who wish to change long-established law via regulatory action in order to expand their membership, resources and influence. After all, since labor unions have suffered historic declines in the marketplace – with the percent of private sector workers being labor union members falling from 24.2 percent in 1973, for example, to 6.7 percent in 2015 – their only means of action is via politics.  However, small businesses will suffer accordingly.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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