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A fearful October for entrepreneurs

AP Photo/Amanda Andrade-Rhoades
The National Labor Relations Board’s top prosecutor, Jennifer Abruzzo, poses for a portrait at the NLRB headquarters in Washington on June 13, 2022.

As Halloween approaches, small business owners and independent workers have a lot to be scared of. The economy is struggling, with the Dow Jones losing over 13 percent of its value this year, inflation hitting 8.2 percent, and gas prices up 16 percent from this time last year. If that weren’t enough, workers and business owners now need to prepare for two regulations from the Biden administration that will attack their ability to earn a living, own a business, or make extra cash.

The National Labor Relations Board (NLRB) is coming after the almost 800,000 franchise owners who employ 8.5 million people. The board’s proposed “Joint Employer” rule, would have catastrophic effects on the franchise industry and restrict the opportunities of small business owners who are franchisees.

The NLRB rule would force franchisors — distant corporate headquarters — to come between franchisees and their employees. It would do so by making both the headquarters and the small business employers of workers at the franchisees’ store. Franchisors would become jointly liable for employment issues involving workers or contractors who are employed or “directly controlled” (as the current standard notes) by a small business.

Under the proposal, the definition of “employer” would change. Franchisors, who do not currently have direct control of people working at a franchisee (their pay, hours, benefits, etc.) would face a very different environment with increased liability for employment issues. The new rule could change owners of the small business franchisees into managers for distant corporations, costing the owners income and opportunity as some corporations would want to take direct control of the employees to avoid potential liability.  

That would be bad enough. But, on Oct. 13, the Department of Labor released its notice of proposed rulemaking that would harm many people who choose to be independent contractors. The proposed rule is an attempt to undo a Labor regulation from the Trump administration that made it easier for independent workers to work for themselves under the Fair Labor Standards Act, a law that covers working hours, minimum wage and other issues.

The proposed rule, which changes the test for determining who is an employee and who is a contractor, does more than simply return to the previous “economic realities test.” It changes the test to favor classifying workers as employees, rather than independent contractors.

The current rule enhances people’s ability to work for themselves and to obtain the income they need to weather economic downturns or soaring inflation. The current test relies primarily on two factors to determine whether someone is an employee or a contractor: 1) the amount of control a worker has over the work performed; and 2) whether the worker has the opportunity to gain a profit (or loss) from an investment. The test has other factors, but primarily, it is focused on entrepreneurial opportunity.

The current test is clear, and it focuses on the core question of whether a worker is truly working for himself. The new test proposed by the Department of Labor adds focus on factors that muddy the waters for people who want to work for themselves. It does the same for business owners who want to contract for their services. Regardless of how the test is framed, the Biden administration has shown time and again that it favors categorizing workers as employees, even if they would rather be self-employed. 

The proposed rules do benefit one group: unions. If a franchisor is deemed a joint employer, unions would be able to organize against the franchisor, rather than individual franchises. This would streamline unionizing efforts. If the Labor rule were enacted and independent workers are reclassified as employees, then unions can organize them. This change would have the greatest impact on people in one of the 23 states that do not have a right-to-work law. These individuals, currently independent contractors, could be forced to pay dues or lose their jobs.  

These two rules would make it harder for workers to work for themselves or own a small business through a franchise. At a time of growing economic uncertainty, workers and entrepreneurs need to be confident they will have more opportunities — not get the trick of being restricted by the traditional employer-employee relationship while giving unions the treat of forced fees. 

F. Vincent Vernuccio (@vinnievernuccio) is president of the Institute for the American Worker and a senior labor policy adviser for Workers for Opportunity, a project of the Mackinac Center for Public Policy. Steve Delie is director of labor policy for Workers for Opportunity.

Tags franchise independent contractors National Labor Relations Board

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