PRO Act legislation threatens franchise small businesses

By: Michael Layman & Caleb Gunnels

February 4, 2021

Today, members of Congress introduced “Protecting the Right to Organize” Act, or the PRO Act. Put simply, it may be the worst legislation for franchising ever considered by Congress, as it puts the very existence of franchise businesses in jeopardy.

You see, the PRO Act cobbles together more than 30 imbalanced provisions designed to tip the scales in favor of organized labor and against small businesses. 

Yet two provisions are worse than the rest for franchising — an industry that empowers new entrepreneurs to operate under a national brand, letting small businesses and national companies grow faster and contribute more to local communities and the wider economy. In its push to unionize franchises, the PRO Act would all but prevent national brands from partnering with small businesses.

First, the bill would enshrine in federal law the Obama administration’s “joint employer” standard. The National Labor Relations Board ruled in 2015 that franchisors — the national firms — can be held responsible for actions taken by the small businesses that use their brands. This puts franchisors at risk of being sued for things they never did and had no power to stop.

Faced with the PRO Act’s new liability regime, franchise companies are much less likely to partner with local entrepreneurs, which means small business ownership opportunities will dry up on Main Street. The joint employer standard created by the National Labor Relations Board in 2015 led to a nearly doubling of litigation against franchise businesses, cost franchising $33 billion per year. and prevented the creation of 376,000 new jobs in the four ensuring years. While the NLRB eventually restored the traditional, clear joint employer standard in 2019, the PRO Act would make the harmful standard permanent, resulting in lower job creation and small-business formation.

The bill’s second provision against franchising is perhaps worse. It would institute a three-part, so-called “ABC test” to determine when individuals can be classified as independent contractors. The purpose is to classify more workers as direct employees, thereby making them easier to unionize. The PRO Act’s ABC test language is so broad that it would likely define franchisees as employees of their brand, instead of the owners that they really are. This would eliminate the distinction at the heart of franchising — and the opportunities and incentives within the business model.

Despite the harm it would cause, the Democrat-controlled U.S. House is expected to pass the bill in the coming weeks, even though in its present form it would hurt millions of small businesses and workers and upend the franchise sector – one of the most important parts of the American economy.

It’s not too late for lawmakers to realize the unintended consequences of the PRO Act, to avert course, and to protect small businesses at a time when many are simply trying to pay their bills with uncertain income during the global pandemic. Millions of workers and companies, and not just franchises, will be harmed if the PRO Act ever becomes law.