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This Simple Definition Change Might Destroy Small Businesses

A move to redefine the franchise model will have disastrous consequences for small business owners, according to a report released Monday by the Competitive Enterprise Institute.

Under the National Labor Relations Act a company can be considered an employer over a company it contracts with if it has significant enough control over its employees. Known as the joint-employer standard, the rule helps to resolve labor disputes when it’s not clear whether the dispute arose from decisions made by the direct employer or a larger corporation it contracts with.

Recently, the National Labor Relations Board (NLRB) received significant criticism from business leaders and lawmakers for applying a broader standard to the joint-employer rule during a few ongoing labor cases. The report “The NLRB Joint-Employer Cases’ Threat to Small Business” by Aloysius Hogan argues such criticism has merit.

“Regular Americans stand to lose a lot as some franchises are regulated out of existence,” the report said. “National Labor Relations Board (NLRB) cases involving three different companies could upend these business practices by radically redefining what constitutes a joint-employment situation—when an employee is considered jointly employed by two businesses.”

The report noted that three separate cases involving McDonald’s, CNN and Browning-Ferris Industries (BFI) are giving the NLRB the opportunity to revisit rules governing the franchise model so it can drastically expand what it means to be a joint-employer.

“The NLRB is using sly means to impose this new definition of joint employer,” the report stated. “Rather than utilize the standard rulemaking process, it has issued an invitation to submit briefs in the pending BFI case, indicating that it would outline its new policy in a judicial decision rather than a rule.”

This, the report claims, is nothing more than an attempt to benefit unions which would otherwise have to organize employees at each individual company within a single franchise as opposed to organizing all employees at once within the same franchise.

“Their goal is to give unions greater leverage against the businesses they seek to organize, by turning many American workers’ employment by one company into simultaneous joint employment by two or more companies,” the report said.

The end result, the report said, is the franchise model ending as we know it. If this happens, the economy could greatly suffer and many jobs could be lost.

“Holding corporate headquarters responsible for a franchisee’s workforce would make franchising much less attractive as a business model,” the report detailed. “The NLRB’s proposed change would end current business practices, dampen economic growth, and incentivize large corporations to move toward large corporate-run operations. It would also impose enormous costs to our economy resulting from higher levels of unionization and more litigation.”

“At stake is the survival of America’s popular franchise system,” the report added. “With more than 770,000 businesses and 8.5 million employees—and temporary staffing with an average of 3.15 million workers per week.”

Worse, the rule change won’t just impact restaurants or other businesses commonly associated with the franchise model, but any business that outsources particular functions or contracts with another origination like large firms that hire outside cleaners and landscapers or those businesses that contract to have outside companies handle cafeteria needs.

“We all know someone who has worked in a temp agency,” the report stated. “Businesses commonly outsource accounting and cleaning. Our cars are manufactured with parts sourced from smaller businesses. Our homes are constructed with subcontractors plumbing the bathrooms and wiring the fixtures. All are at risk.”

Simply put, with how intertwined so many businesses are through contracting, the rule change is likely to have an impact beyond just the franchise model. Though the courts could help, lawmakers will likely have to take action to resolve the problem.

“Congressional action is warranted,” the report urged. “Litigation could take years to resolve, by which time several entire industries could be thrown into disarray. Congress needs to legislate relief to businesses and workers who would suffer as a result of the NLRB’s aggressive, pro-union agenda.”

The NLRB has defended its “joint employer” decision by stating that franchisors have too much control over the independent franchisees they contract with for them to be considered their own operations.

“Through its franchise relationship and its use of tools, resources and technology, engages in sufficient control over its franchisees’ operations, beyond protection of the brand, to make it a putative joint employer with its franchisees, sharing liability for violations of our Act,” the NLRB argued.

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