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New Joint Employer Standard Hurting Business of All Sizes

Recently, the business community aired their grievances about the National Labor Relations Board’s new joint employer standard in the form of briefs from Microsoft and the U.S. Chamber of Commerce, among others. The Senate Committee on Small Business and Entrepreneurship also held a hearing on June 16th to learn about the standard’s impact on small business, especially franchisees. The new standard expands the previous definition of “joint employer,” muddying the qualifications that used to be common sense rules based on direct control.

The 3-2 ruling by the Board in 2015 that went against Browning-Ferris Industries broadened the standard to include indirect control or potential control as qualifications for joint employer status. Microsoft, for instance, fears its standard of 15 paid days off it sets for contracting companies opens them up to being considered a joint employer, as stated in their brief. This Corporate Social Responsibility-style policy, which President Obama lauded, is likely to be ditched by Microsoft and other companies with CSR commitments due to its new implications.

So how will this damage the small business community?

One witness at the hearing, a franchisee, explained that “Due to the new joint employer standard and its increased liability for my franchisor,” assistance has been withdrawn. Lynn Berberich, a franchisee of BrightStar Healthcare of Baltimore City/County argued the vagueness of the law by no means protects small business, as another witness proposed.

Even if a company might not be accused of being a joint employer by the NLRB, the risk is too great. The Washington Legal Foundation echoed a similar concept in the amicus brief they filed in the Browning-Ferris case, arguing the ruling “significantly expands the scope of the joint-employer doctrine, yet is so vague that regulated entities cannot confidently predict whether the new standard will result in the doctrine being applied to their future operations.”

“BrightStar has been forced into the unfortunate position of having to distance itself from its franchisees. BrightStar is understandably reluctant to provide any help or even advice on any matter that remotely relates to employment; instead, I now have to pay out of my own pocket for products and services that I used to receive as part of my franchise fee,” said Berberich.

The real impact: higher costs to the franchisee along with a more complicated business plan which the franchisee structure was supposed to alleviate.

From the other side of the franchisee-franchisor relationship, Ciara Stockeland, the Founder and COO of a designer fashion discount chain called MODE, explained how she is reluctant to give any guidance to the franchises that extend over six Midwest states due to the increased liability on “employees that [she] didn’t hire, don’t supervise, and [she] should not be liable for.”

James Sherk, a Research Fellow of Labor Economics at the Heritage Foundation, echoes Stockeland’s concerns. “The law will hold franchisors legally liable for their franchisees’ potential labor violations. But franchise brands have no control over these workers. They do not hire, fire, schedule, promote, supervise, or pay them. The franchisees do. Franchise brands would face liability for actions they have no power to detect or prevent.”

He then dives into the impacts of this increased liability. “To prevent this most currently franchised brands would probably replace their franchised stores with corporate owned ones. The new joint employment doctrine could destroy the franchise business model.”

A cornerstone of the entrepreneurial spirit of America is owning and operating a franchise, which Berberich describes as “franchising allows you to be in business for yourself, but not by yourself.”

While this is not the intended impact of the ruling, unintended consequences must be considered.

Sen. Tim Scott (R-S.C.) recognizes this oversight “As we’ve seen with the overtime rule, which is another unworkable mandate that has real impact in the real world. Part of the challenge that I have, honestly, is sometime how well-intentioned the government may be, but unintended consequence is fewer employees, less expansion, a real impact on people working paycheck to paycheck.”

He continued, “They’re trying to find a way to keep their families moving in the right direction, and sometimes, too often, the new red tape, threefold increase in legal costs, makes it more difficult, not more possible, for expansion to occur.”

Overall, legislators and regulators need to consider the actual, factual impacts of their rulings, not just their optimistic hopes and intentions.