Labor Reform Is Necessary To Sustain Economic Optimism, Growth

Economic optimism is on the rise among small businesses and consumers alike, judging from recent surveys. The monthly Index of Small Business Optimism finds the highest optimism rate since December of 2004.

Over half of the small businesses surveyed said they are hiring or trying to hire, and many said they expect sales to increase and to expand their business. Consumers share that optimism, with consumer confidence in the economy at a 15-year high.

Why are people looking up these days?

One big factor must be the Trump administration’s enthusiasm for sweeping away regulatory burdens. When businesses spend an inordinate amount time doing paperwork for regulators or face government crackdowns for even the smallest missteps and infractions, those businesses are less able to afford or plan expansions, job creation and wage increases.

Red tape has been one of the top concerns of employers, according to multiple surveys, from ADP and the international law firm Littler Mendelson to the National Association of Manufacturers and Wells Fargo.

But despite the postelection optimism, hard work remains ahead when it comes to actually scaling back job- and business-killing regulations. And one of the biggest offenders in that regard is the new “joint employer” liability standard imposed by the Obama administration’s National Labor Relations Board (NLRB).

The board’s August 2015 decision in a case against waste management company Browning-Ferris overturned 30 years of precedent — government rules that companies had relied upon for decades — that determined when two companies are considered joint employers of an employee. Those standards are important because they determine if a company, such as a franchise business or manufacturer, is liable for labor violations committed by a company they do business with but do not directly control, such as a franchisee or contractor.

This is a big deal. Prior to the ruling in the Browning-Ferris case, a common-sense policy was in place. Joint employment was established when one company exerted direct and immediate control over another firm’s workers.

For the last 30 years, a company had to directly control key employment terms, like hiring and firing or pay and work assignments, to assume joint employer liability. Now, a company may be forced to assume liability if they exercise indirect or unexercised potential control. It’s a fuzzy standard, so no one knows for sure what their liability will be.

The most immediate fix to the problem lies with the courts. On March 9, the United States Court of Appeals for the District of Columbia Circuit will hear oral argument in the Browning-Ferris case. Hopefully the court will restore the long-standing precedent because the new joint employer standard is inconsistent with the intent of Congress.

The National Labor Relations Act made it necessary to exercise direct and immediate control to establish an employment relationship, not merely indirect control. Holding a company liable for employees it actually employs and exerts day-to-day control over makes sense. Holding a company liable for the employees it doesn’t control makes no sense.

It is important to recognize that most contractors, franchisees and staffing agencies — the entities that will bear the brunt of the harm of the change — are independent small businesses that partner with other businesses. Those independent businesses make all the day-to-day decisions related to pay, hiring and work conditions of their employees, so a joint employer relationship should not exist.

The Obama fiduciary rule threatens to stifle these beneficial business relationships. One of the business models that is in the new joint employer standard’s cross hairs is the franchise industry, which consistently outpaces the rest of the economy.

Franchise businesses support roughly 8.9 million direct jobs and $890 billion of economic output for the U.S. economy. The Obama standard can ruin these successful business models by incentivizing large companies to steer clear of contracting with small businesses entirely. Without congressional or court intervention, the NLRB’s action will block a path toward entrepreneurship, reduce job creation, expand employer liability, increase employment insurance costs, lead to a surge in lawsuits, and disrupt thriving business models. That could put a real damper on economic optimism and opportunity.

Originally posted to Investor’s Business Daily.