A stunning new ruling by the Obama administration’s National Labor Relations Board (NLRB) turns the existing franchise model on its head, hurting small business owners and customers in the process.
In a 3-2 decision, the NLRB ruled Thursday that companies can be held liable as “joint employers” for labor violations committed by their contractors or franchisees. The case concerned Browning-Ferris Industries, a waste-management company, and its relationship with Leadpoint Business Services, a staffing company Browning-Ferris used to hire and manage workers.
Experts have long feared this NLRB ruling after the board ruled late last year that McDonald’s was a joint employer. Hearings over the McDonald’s case will continue over the next few months.
The McDonald’s decision late last year was issued because the NLRB held that McDonald’s exercises “sufficient control over its franchisees’ operations” and should thus be considered a “joint employer” for purposes of collective bargaining. This is a much broader standard than previous law, which held that in order to be a joint employer, the franchisor must have direct influence in policies such as hiring, firing, wages, and discipline.
The 3 Democrats, voting in favor of the Browning-Ferris decision Thursday, solidified this broader standard. The two Republicans, dissenting from the ruling, warned that this change in policy would complicate existing relationships with contractors or franchisees. “The result is a new test that confuses the definition of a joint employer and will predictably produce broad-based instability in bargaining relationships,” they said.
Amir Siddiqi, a Pakistani immigrant who owns many Carl’s Jr. and Pieology restaurants, explained to the Wall Street Journal how his franchise relationship works. “I choose whom to hire, the wages and benefits employees are paid, the way employees are monitored and evaluated, and the circumstances under which they’re promoted, disciplined or fired,” said Siddiqi. In return for the brand, Siddiqi typically pays 4 percent of total sales back to the franchisor.
Siddiqi has full authority to decide where to open new restaurants as well as who to hire to run them. He determines the management styles and scheduling practices for his restaurants, without any input from the franchisor.
But that could all change with this ruling, which could make franchisors intervene in the day-to-day decisions of their locations because they are now jointly liable. “My franchiser might feel that it needs to be present in my restaurants to monitor the workplace, dictate or even administer employee training, and increase staffing as it, rather than my general managers and I, deem necessary,” said Siddiqi.
According to Iain Murray, vice president of strategy at the Competitive Enterprise Institute, Thursday’s decision is bad news for the economy. “For example, the NLRB’s new standard could force Silicon Valley startups to hire the receptionists and cleaners they currently get from staffing or property management companies,” said Murray. “It will adversely impact the innovative sharing economy, where technology has drastically lowered transaction costs, enabling people to come together to share services in novel new business relationships.”
All five members of the NLRB were appointed by President Obama.