Nov 17, 2015

NLRB Franchise Ruling Threatens Employers, Large and Small

Post by Mary Kate Hopkins

Earlier this year, the National Labor Relations Board (NLRB) handed down a 3-2 ruling that could spell disaster for the franchise industry, and any other businesses that rely on contract work for success.

The NLRB has long held that in order to be considered a “joint employer” for the purposes of finding legal liability in a lawsuit, a parent company had to exercise control over the terms of employment that was “direct, immediate, and not limited to routine.”

Now, rather than looking for evidence of direct control, the NLRB will simply look to see if the parent company could conceivably control those conditions, regardless of whether or not that power is ever exercised in reality.

If the NLRB finds any amount of “indirect control” exists, the parent company may be found jointly liable with the franchisee for any employment or workplace violations that take place.

This ruling seems complicated and the language of the decision is bogged down with legalese, but it essentially boils down to this: Any company that deals with franchises, contractors, temp agencies, staffing firms, etc. can now be considered a “joint employer” for the purposes of being sued and potentially forced into collective bargaining with those distant employees.

An illustration will be helpful in this case. Take McDonald’s, for instance.

McDonald’s, Inc., operates on a franchise model, whereby the individual franchise locations are actually owned by franchisees, who operate the restaurants and retain control over the employees and the day-to-day business. Under this new ruling, McDonald’s, Inc., can be held at least partially liable for wage and workplace violations made by any of its 14,000 franchise operators in the United States.

It also means that McDonald’s, Inc., could be pulled into any number of collective bargaining talks if the employees of those locations join a union—and unions have had the fast food industry on their wish list for years.

This could spell disaster for any businesses operating on franchise models, but it is no surprise that labor unions are cheering the decision—after all, they have much to gain from it. In fact, if the Service Employees International Union (SEIU) is successful in unionizing just one third of the fast-food workforce, it could rake in an extra $400 million in dues each year.

And this ruling doesn’t just affect large employers like McDonalds—it will have an impact on practically every business sector, large and small. In fact, according to the dissent in the ruling, “the number of contractual relationships now potentially encompassed within the majority’s new standard appears to be virtually unlimited.”

The impact will be felt on Main Street as well as Wall Street, when large companies cease to contract with small, local businesses because they can’t afford to take on increased liability risks.

In an already weak economy, Congress cannot just sit back and subject nearly every American business to this increased liability risk. It would wreak havoc on the business community, threaten jobs, and drive up prices for consumers. Congress should exercise its power of the purse and seek to prohibit funds from being used to enforce the ruling.