Quiet decision that could hurt small businesses

Some of the most damaging interventions by the federal government have come from obscure corners of the bureaucracy. That’s potentially the case in the next week or so from the National Labor Relations Board’s Division of Advice.

The legal advisory department of the NLRB is on track to issue a ruling that could have devastating consequences for the nation’s 770,000 franchisees, the mom-and-pop owners of neighborhood restaurants, hotels, print centers, realtors and flower shops that directly employ 8.5 million workers.

The question before the NLRB’s Division of Advice is whether McDonald’s Corporation is a “joint employer” with the workers of its approximately 3,000 U.S. franchisees. The answer should be obvious. For more than three decades, the NLRB, Small Business Administration and Federal Trade Commission among other federal and state regulatory bodies have recognized what franchise contracts say in black-and-white: franchisees are independent, small-business owners who have complete authority over their employees, not the large corporations to which they pay an initial franchise fee and ongoing royalty payments to use the trademark.

Franchisees operate separately from the franchisor. Franchisees have their own employer identification numbers with the Internal Revenue Service and file their own taxes. Franchisees process their own payrolls and hire and fire their own employees. They also determine wage rates, benefits and work schedules. .

The franchisors have different responsibilities. They set brand standards to maintain the quality of products and services to ensure a consistent, quality experience for consumers. They also often provide training and advertising support, both of which are paid for by franchisees. But none of these activities include employment practices and policies at the franchisee level. That’s the franchisees’ domain and ultimate responsibility.

The Division of Advice is under heavy pressure from labor unions led by the Service Employees International Union to declare McDonald’s a “joint employer.” The reason is simple. The SEIU has wanted to organize restaurant chains and other franchises for years so that it could replenish its treasury.

But the task of doing so is too daunting if each franchisee is separate. The SEIU would much prefer to unionize an entire chain all at once. There’s no faster way to do that than for the SEIU to get its allies in the federal government to simply pronounce whole chains, like McDonald’s, to be a single entity.

Such an edict would create huge problems. Years of federal and state legal precedent would be upended and thousands of small business owners would lose control of the operations they worked hard to build. The result would be a wave of “going out of business signs” across the country and thousands of lost jobs. Signed contracts would be tossed away as if they had never been written. 

Hampering franchises in this way would hurt local communities and the overall U.S. economy. Franchise businesses are responsible for one out of every eight private-sector jobs in the U.S. and 3.4 percent of U.S. gross domestic product. Franchisees create new jobs and new businesses at twice the rate of other business segments. 

In other words, undermining the franchise model could have a seriously detrimental impact on the still fragile and uneven U.S. economic recovery.

Entrepreneurs are drawn to franchising because it is a proven, time-tested business model. But if control is taken away from these small-business risk takers who invest their own financial resources, fewer new businesses of this kind will be started. 

This, in turn, will slow job growth. Unlike many other sectors of the economy, franchising has been growing consistently.  In addition, large brands will probably opt to open corporate locations instead.  That will reduce the number of entrepreneurs who are the backbone of Main Street America and help to create two-thirds of net, new small-business jobs in the U.S. 

If it’s thinking about breaking the tried-and-true franchise business model, the NLRB’s Department of Advice should keep its advice (and blatant political agenda) to itself.

Caldeira is president and CEO of the International Franchise Association.