New Labor Rules Attack Franchise Businesses

In modern America, it’s often in the dusty halls of little-known bureaucratic agencies that some of the most economy-defining events take place. The most recent example is the National Labor Relations Board’s newly issued “joint employer” rule, which debuted last month to relatively little mainstream media attention. The rule is just the latest in the progressive left’s effort to bludgeon the country into a one-size-fits-all economic vision.

The NLRB’s new rule changes the definition of what constitutes a “joint employer,” which may sound like some arcane definitional technicality that only labor lawyers need to worry about. But in reality, it is a revision that will upend the business models of entire American industries. The rule specifies that a joint employer relationship will be found any time two entities share or co-determine the terms and conditions of employment.

All that’s needed for this finding is for an entity to possess indirect control—even if it does not exercise that control—over workplace issues such as wages, scheduling, or health and safety rules. In layman’s terms: A parent corporation like McDonald’s could be deemed a joint employer with one of its franchisee outlets for something theoretically as small as creating rules for how to keep employees safe when operating the nugget fryer. The NLRB rationale for this change is that the prior Trump era rule allowed parent companies to unfairly avoid negotiating with workers and assuming liability for labor law violations.

The franchise model exists because it helps scale a business drastically beyond what a single centralized company could operate by itself. Deeming parent corporations joint employers would therefore undercut the entire rationale behind the franchise system if employees at thousands of outlets are suddenly deemed employees of the parent. This would make the parent company liable for potential labor law violations at discrete franchise stores, even though the real cause could simply be a poorly run outlet. It also empowers unions by giving them a foothold to collectively bargain directly with the parent corporation rather than having to organize at the individual franchisee level.

According to the International Franchise Association, an Obama-era iteration of the joint employer rule—which the new rule largely presages a return to—led to a 93 percent increase in litigation and over 376,000 lost jobs. The franchisor-franchisee business model is one of the most important in America. In addition to the countless fast food and fast-casual chains dotting cityscapes across the country, hotels, auto repair shops, and retail stores are also industries that commonly operate under the franchise model.

Franchise ownership is one of the most common ways to achieve the American dream given that owning a franchise usually requires lower startup capital and creates an affiliation with an established brand that has ready-to-go procedures and systems in place that allow new owners to hit the ground running. This expands the pool of people who become business owners, which is reflected in the fact that immigrants and other minorities are more commonly found owning franchise outlets than other businesses.

The franchise system is also not the only business model that could be impacted. Companies that contract with third-party service providers (I.T. and janitorial services are common examples) and even gig-economy companies could face the prospect of being deemed a joint employer under the new rule.

The import of the NLRB’s rule is that it is trying to limit the flexibility of companies to structure themselves how they deem best. It’s a one-size-fits-all economic vision where every sector and business is coerced into operating under one model. Sadly, the joint employer standard is just one example of the political left’s growing push to one-size America’s economy.

Not only could the NLRB’s rule persuade more states to redefine the joint employer relationship for their state labor laws, but states and localities are also increasingly targeting another long-established American tradition: tipped wages. For instance, Washington, D.C., banned the tipped wage structure in a voter initiative last year, meaning that the tips restaurant workers receive cannot be calculated as part of their wage.

For decades, the on-premise restaurant industry has used the tipped wage system, paying servers a sub-minimum wage with tips making up the gap—and often far exceeding it, which is why servers often prefer the setup. Instead, D.C. restaurants will be forced to pay all servers over $16 an hour by 2027, nearly three times the current base wage amount. In turn, this will likely mean costlier dining and more restaurants being forced to shutter. Progressive states like New York, Maryland, and Illinois have recently considered banning tipped wages as well, showing that the idea is spreading.

The war against the gig economy also fits within the one-size-fits-all economic push. States like California have notoriously attempted to reclassify all gig-economy workers—who traditionally operate as independent contractors—as full-scale employees. This idea has moved to Congress, making its way into the Democrat-supported Protecting the Right to Organize (PRO) Act.

Franchise stores, restaurants, and the gig economy operate far differently than the traditional concept of a 9-to-5 workplace housed at a centrally located company. Rather than viewing this as a feature of America’s dynamic and flexible economy, the progressive left seems to want a monolithic economy regardless of its impact on businesses and workers. If it gets its way, we could end up with a one-size-fits-all recession.

Originally published by Reason Foundation. Republished with permission.

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