If franchisors get involved in employment practices, labor unions will be better positioned to organize and negotiate collective bargaining agreements for an entire franchise system’s employees. 

By Michael Layman and Nicholas Johns

This month, hundreds of franchise operators will take time away from their work and personal lives to advocate on behalf of their businesses during the International Franchise Association’s Franchise Action Network Annual Meeting.

Why would they do that? Who wants to travel all the way to Washington, D.C. to meet with politicians? Don’t they know Congress has an approval rating in the single digits, just below other disreputable professionals such as lobbyists (present authors not included)?

Franchise business owners are coming to the FAN Annual Meeting Sept. 28-30 because, as the old Washington saying goes, “If you’re not at the table, you’re on the menu.” In the franchise context, that means if franchisors and franchisees are not sharing their small-business, job-creation and community-engagement stories with policymakers, then we are standing by idly while certain politicians continue to harm the successful franchise business model.

Thankfully, advocates of franchising are actively defending the business model. From this month’s FAN Annual Meeting to the recent efforts of the Franchise Action Network (www.franchiseactionnetwork.com) and the Coalition to Save Local Business (www.savelocalbusinesses.com), awareness of both the virtues of, and threats to, franchising are greatly increasing in Washington and around the country. We have won significant victories in recent months and years defending franchise businesses. Yet, aggressive attacks on franchising will continue, and perhaps the most transformative threat is the effort of the National Labor Relations Board to create a new “joint-employer” doctrine.

Over the past year, the NLRB has plainly worked to overturn practically all federal labor law precedent and invent a new “joint-employer” standard. Such a change threatens franchise businesses because it would make franchisors and franchisees jointly liable for franchisee employment actions.

In response to the NLRB’s activism, we formed the Coalition to Save Local Business, a group of locally-owned, independent small-business owners and their trade associations that have joined to protect small businesses through advocacy and grassroots efforts. The coalition is led by numerous local small-business owners who agree that a new joint-employer standard is an existential threat to their ability to operate independently.

CSLB Co-chair and FASTSIGNS International franchisee Barbara Craigie expressed coalition members’ views on the joint employer issue when she stated, “I am very concerned about losing control of the day-to-day operations of my business. I am also concerned that my 20-year franchise agreement will change from an opportunity to own my own business to becoming a manager who reports to a corporate entity.”

What is the “Joint-Employer” Threat?

Since 1984, the NLRB has held a consistent standard for evaluating whether one employer can be found jointly liable for another entity’s employees. The current joint-employer standard examines whether or not the organization in question has “direct and immediate control” over employment practices such as the wages, scheduling, hiring and termination of employees. Upending decades of precedent would likely throw current franchise agreements and other business contracts into disarray, which would in turn result in expensive litigation to defend business relationships.

This push to upend existing precedent is the result of pressure by Big Labor union bosses. The NLRB’s five members and general counsel, all appointed by President Obama, have worked on behalf of influential organized labor groups, such as the Service Employees International Union (SEIU), to try to transform the small business landscape. Labor unions want to streamline complex, multi-organization business relationships because, put simply, big businesses are more fruitful than small businesses to organize workers. In the franchise context, labor unions want franchisors to be jointly liable for franchisee employment decisions in the hopes that franchisors will begin to impose employment control over franchisees. If franchisors started to get involved in employment practices, then labor unions would be better positioned to organize and negotiate collective bargaining agreements for an entire franchise system’s employees.

Labor unions’ campaign to attack franchise businesses is a way to increase their revenue and reverse their long-flagging membership rates which have fallen to 6.6 percent of private sector workers nationally. According to Littler attorney and workplace policy expert Michael Lotito, “a new joint employer standard may make it easier for unions to organize multiple franchisees of a single franchisor.”

Under the new standard, unions would have the advantage of being able to picket any location under the same franchise system, from corporate offices to other franchisees. This stands in contrast to current union regulations, where because the franchisor is labelled a neutral party, unions are restricted from picketing headquarters or other locations. Additionally, if franchisors can be held jointly liable, it also means that franchise system-wide union votes could occur. This would result in gains of thousands of union members for large unions, rather than the handfuls gained by unionizing single locations at a time.

Federal Progress

Thanks to the vigorous engagement from small-business advocates, the CSLB and IFA have been successful in pushing back against NLRB overregulation. While not yet law, the U.S. House and Senate Appropriations Committees have each approved legislation defunding any enforcement of a new “joint-employer” standard in their respective Fiscal Year 2016 spending bills.

Following the actions of the Appropriations Committees, CSLB Executive Director Michael Layman praised the legislators for taking a stand against the hyperactive NLRB:

“The National Labor Relations Board’s attempt to rewrite the very successful joint employer doctrine jeopardizes every franchise business and every small business that relies on contract work. We thank Appropriations Chairmen Thad Cochran (R-Miss.), Hal Rogers (R-Ky.), Roy Blunt (R-Mo.) and Tom Cole (R-Okla.) for their leadership in defending small businesses, and ask all members of Congress to support the joint employer provision approved this week by the Appropriations Committees.”

The NLRB seeks to change the current standard to a vague and subjective test that hinges on whether or not “economic realities” create an “indirect control” over employees. Specifically, the Browning-Ferris amicus brief submitted by NLRB General Counsel Richard Griffin, asserts that “franchisors can exert significant control over the day-to-day operations of the franchisees.” This amicus brief combines with 13 complaints issued against McDonald’s and its franchisees, which state that “possessing” control over labor relations policies of a franchisee is sufficient to establish a joint employment relationship.

The uncertainty surrounding this new standard centers around its economic impacts on the franchisor-franchisee relationship. Decreasing franchisee independence could negatively impact new franchises, since the freedom to run your own business is a significant selling point for potential franchisees. Additionally economic studies indicate that the new standard has the potential to significantly raise compliance, litigation and insurance costs for franchisors. This could have a chilling effect on the number of new franchises formed, and decrease the number of new franchisees. Franchisors may simply allow franchise agreements to expire and choose not to renew the franchisee.

Evidence of this chilling effect can be seen in statements of franchisors such as Mark Kulkis, CEO of ChopStop Inc. who said, “I was on the cusp of launching a major expansion through franchising. But this issue of joint employer status is giving me pause. I have decided to put my expansion plans on hold for the next year to see how this pans out. If it passes, I will not franchise.”

Even more threatening is the likely expansion of the joint-employer theory to other agencies, such as the Equal Employment Opportunities Commission, the Department of Labor, and the Occupational Safety and Hazard Association. Each new liability will create an increase by orders of magnitude for the compliance and litigation costs associated with franchising. Based on this evidence, it is clear that the expansion of the joint-employer standard will likely prove extremely harmful, if not fatal to the franchise industry. In light of massive increases in liability, franchisors will either increase oversight of franchisees, or more likely, choose to expand without franchisees, instead reverting to corporate-owned locations.

The approval of these bills by both the House and Senate Appropriations Committees marks major progress towards negating the overreaches of the NLRB’s radical rulemaking. However, Democrats from both chambers are opposing these riders on other grounds, therefore continuing vocal support of franchising is critical to ensuring the industry’s survival.

State Progress

On the state level, IFA has worked with leaders in several state legislatures to protect franchising by pushing positive legislation to stop the NLRB’s joint employer efforts and affirm that franchisee and franchisor employees are separate entities. In Tennessee, Gov. Haslam and the state legislature worked hand in hand to create a bill that states “neither a franchisee nor a franchisee’s employee shall be deemed to be an employee of the franchisor for any purpose, notwithstanding any voluntary agreement between the U.S. Department of Labor and a franchisee.” Legislation in Texas (SB 652) and Louisiana (HB 464) also protect the franchise industry with similar language.

All of these bills passed with nearly unanimous consent, and only the Louisiana bill has yet to be signed into law. In regards to Louisiana, IFA President and CEO Steve Caldeira, CFE, had this to say: “Louisiana should be applauded for its leadership in tackling this issue head on. As the National Labor Relations Board continues its assault on the franchising model, it’s heartening to see state legislatures stand up for the franchisees in their states that are creating jobs and opportunities for workers and business owners. Even more important, they are doing it in a bipartisan way.”

How you can get involved

Supporters of local businesses have been active and vocal in their opposition to the NLRB’s overreach on the joint employer issue. Franchisors and franchisees state that this new standard will create major issues for their businesses, and threaten job creation. Labor experts also recommend reviewing current policies to maximize a finding of two “separate” businesses, and for franchisors, to direct franchisees to use their “company-owned” outlets as examples. 

While significant progress has been made at both the federal and state levels, the issue is far from over due to heavy Democratic opposition in Congress. With the possibility of an omnibus budget deal coming later in the year, supporters of local businesses must remain vigilant and vocal in keeping up the momentum with their representatives in the House and Senate.

Making a difference is as simple as writing a letter or joining the Franchise Action Network at www.franchiseactionnetwork.com. We also hope you will attend IFA’s FAN Annual Meeting in Washington, D.C. on September 29-30. 

Michael Layman is vice president of regulatory affairs for IFA and executive director of the Coalition to Save Local Businesses, and Nicholas Johns is an intern in the government relations department at IFA. Find Michael at fransocial.franchise.org.

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