Will the NLRB’s McDonald’s Decision Destroy Franchise System or Make Companies More Accountable?

That was the question at the center of a September 9 House Health, Employment, Labor, and Pensions Subcommittee hearing, which was held in response to the National Labor Relations Board’s (NLRB) July 29 decision declaring McDonald’s to be a “joint employer” with all of its local franchisees across the country.

Subcommittee Chairman Rep. Phil Roe (R-Md.) warned that the decision would diminish business opportunities for Americans by destroying the franchisee model that allows entrepreneurial people to use an established brand name to start a business instead of starting on their own from scratch.

The first witness, Catherine Monson, CEO of a franchise who has been in the business for 30 years, warned that the NLRB decision would impact many lines of business in addition to hotels and restaurants, including accounting and home improvement services. Monson said that, “I have seen franchising allow people to achieve the American dream of business ownership.” She expressed strong disagreement with the ruling, because franchisees pay their own taxes and hire, fire, manage, schedule, and train their own employees. The franchisor sets overarching standards to protect the brand name but has no input on franchisees’ labor relations.

But if franchisors were required to have direct input over labor relations, they would be liable for any charges of unfair labor practices. The potential for significant legal costs would force franchisors to enhance their oversight of the franchisee. Monson said this enhanced oversight would reduce franchisees’ autonomy, thus effectively ending the franchisee system. When asked about the costs to franchisees from this decision, Monson said there would have to be “cuts.”

Jagruti Panwala, a first generation immigrant from India and a franchisee, said that she would not have started her own business without the franchise system. Panwala said that franchising helped her business grow by attracting new customers and that, “Ultimately, franchising appealed to us because we still controlled our own business and simply paid fees for the use of a brand name.” Panwala, who employs roughly 200 people at a hotel, said that the impact of a decision forcing her franchisor to be involved in labor relations would hurt morale of her employees, some of whom have worked for her for over a decade. She described the potential restructuring of the franchise system as “devastating” to her business and said that it would make her an employee of the parent company instead of a business owner.

Clint Ehlers, the owner of two franchisees, argued that the decision would take away his autonomy as a small business owner. Eiliers said that, “I have my own accountants and I file my own taxes.” Eilers had to cut one of his full-time employees but the flexibility that comes with running a small business allowed him to offer to keep said employee on for 60 days, with a paycheck, until she could find another job. That flexibility would not have been possible if he lacked the autonomy the franchisee system allows.

Finally, labor attorney Todd Duffield testified that the NLRB decision upends decades of precedent. Federal labor law has long recognized a bright-line test to determine joint-employer or franchisee status: If two entities share or co-determine working conditions, they are joint employers. But now that test is being changed and the classification of joint-employer depends on whether one entity exercises any indirect or potential control over working conditions at a workplace controlled by another entity. Duffield asserted that this new classification would destroy the franchise model because every franchisor would be considered a joint-employer under this new standard. According to Duffield, “The proposed standard would destroy, or at least create a massive upheaval of established, highly successful business models involving franchisors or franchisees throughout the country.”

The lone dissenter was law professor Harris Freeman, who downplayed concerns that the decision would destroy the franchise model by saying that the decision would require the NLRB to look at each franchisor-franchisee relationship on a case-by-case basis to see if there were any instances of co-determination of working conditions. He said he did not believe the decision would eliminate the franchise system entirely, but would instead correctly classify certain business relationships.

Towards the end of the hearing, that argument prompted Rep. Tom Price (R-Ga.) to rhetorically ask, “If McDonald’s is a joint-employer, who isn’t a joint-employer?” 

Freeman also said he thought the decision was necessary to counter the rising trend of companies outsourcing essential business functions to temp agencies in order to keep workers permanently underpaid. Referring to the largest fast food chains in the country, Freeman said, “Soaring profits and substantial job growth in temping and franchising has advanced hand in glove with poverty-level wages and extraordinarily high rates of wage theft and health and safety violations.” The decision, according to Freeman, would force the user company to be brought to the bargaining table with the temp agency and the union so that workers could effectively negotiate better pay and working conditions.

This “perma-temp” trend may be troubling, but it is unsurprising as businesses are forced to operate in a harsh economic climate thanks to the Obama administration’s costly overregulation during a fragile economic recovery. Businesses must make changes to keep making profits. As Bloomberg Businesseek tells us, “[T]he brutal recession has prompted more companies to create just-in-time labor forces that can be turned on and off like a spigot.”

The causes of the perma-temp trend lie in harsh economic conditions, not in a harsh business culture. To fix the problem, we need a stronger economic recovery and that will not come from destroying the franchise system, which, according to Monson’s testimony, employs 8 million Americans and is slated to add 221,000 new jobs this year—none of which will be outsourced. Without a franchise system, it would be much harder for Americans to start small businesses.