Few things are as dear to the owner of a small business as the entity that has resulted from his sweat, labor and love. That holds true whether the business is a standalone retail shop or a local outlet of a regionally or nationally known franchise system that serves as an anchor in the community, sponsoring Little League teams, hometown service projects and charity drives.
But recently, unelected labor regulators in Washington have put in their crosshairs those small businesses that are locally owned franchises. Their aim is to use the precedent of a recently decided labor dispute to declare that the “employer” of the workers at that local franchise is not the small businessman who built it, hires its employees and schedules their work shifts, but rather the faraway franchisor, regardless of its size, whose brand lends its name and marketing prowess to the family-owned operation.
The concern is over what is known as the Joint Employer Rule, which in theory states that the faraway franchisor corporation and the small local proprietorship jointly employ the workers at the local business. In August, in a decision known as the Browning-Ferris Industries case, the National Labor Relations Board said that company was a joint employer with a staffing services firm that provided employees for subcontracting work at a Browning-Ferris recycling center.
The labor board’s decision overturned more than 50 years of regulatory and legal precedent. It also established a new “joint employer” test based on direct, “indirect” or even “potential” control of another company’s employees. This new test is so broad and ambiguous that no contractual relationship is safe from a joint employer finding. The Browning-Ferris decision sets a dangerous precedent that is greatly disruptive to the future of all franchise businesses.
Ever since the decision, the labor board’s general counsel and progressive lawmakers have been actively trying to assuage the franchising community’s concern that franchising is at risk, saying that the industry is “crying wolf” over the impact the Browning-Ferris decision will have on franchising. To bolster their argument, they cite a separate case known as Freshii that, unlike the Browning-Ferris case, does not hold the force of law.
In April, the labor board’s Division of Advice wrote a memorandum finding that a franchisor named Freshii was not a joint employer with its local franchisee. But that memorandum did not create a blanket rule for the franchise industry; advice memoranda apply only to the case at hand. In addition, the memorandum was issued four months before the August Browning-Ferris decision, which the board said was intended to “make clear how that [joint employer] standard is to be applied going forward.” In other words, Browning-Ferris has precedential value on all subsequent cases, and Freshii has no precedential value at all.
And what will be those subsequent cases? The labor board continues to pursue a large joint-employer case against McDonald’s. When that case goes to trial in January, the labor board will be seeking to prove that small-business owners who have built local McDonald’s franchises are joint employers with the corporate franchisor, essentially relegating the small business owners to the role of middle managers. Now, small business owners have no choice but to prepare as if the NLRB will seek to apply the Browning-Ferris decision to the entire franchise industry. The result will undoubtedly be increased costs and expanded liability that may slow hiring and expansion for many franchise businesses.
Thankfully, members of Congress have introduced commonsense legislation that can bring much-needed certainty to franchising and also help small business owners. The Protecting Local Business Opportunity Act, which was introduced in both the House and Senate and already has bipartisan support, creates the only safe harbor for franchises dealing with the uncertainty created by Browning-Ferris. The bill would roll back the Browning-Ferris decision and restore the joint employer standard that has protected small businesses and entrepreneurs for decades. Similarly, language included in the omnibus appropriations bill, preventing the new standard from going into effect for one year, would at least give franchises time to figure out and adapt to the new standard. That will allow the continued flourishing of small businesses, which rather than “crying wolf” are simply calling to be left alone to continue their life’s work of supporting their communities and creating jobs.
Lotito is labor counsel to the International Franchise Association and Hershman is general counsel to IFA.