President Obama’s top labor arbiter dealt a blow to the franchise business model on Thursday.
The National Labor Relations Board, or NLRB, issued a decision holding national corporations accountable for the actions of subcontractors and franchises that operate under the company umbrella. The Browning Ferris v. Teamsters Local 350 decision overturned the longstanding precedent that corporations were not accountable for the labor practices of franchisees because the latter have autonomy over day-to-day operations.
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"We are persuaded that the current joint-employer standard is not mandated by the Act and that it does not best serve the Act’s policies," the board said in a 3-2 party-line decision. "The Board may find that two or more entities are joint employers of a single work force if they are both employers within the meaning of the common law, and if they share or codetermine those matters governing the essential terms and conditions of employment."
Numerous business groups and small business owners criticized the decision, saying it would kill the franchise model.
"This decision throws a hand grenade at any small business that operates within the franchise model, serves as a subcontractor or engages in partnerships. If it is allowed to stand, it will have a chilling effect on existing and aspiring entrepreneurs, dampen economic activity and cost U.S. jobs," Ciara Stockeland, owner of MODE retail clothing stores, said in a press release from the Coalition to Save Local Businesses.
Mariana Huberman, a co-chair of the coalition and owner of a single UPS Store location, said that the decision undermined the "foundation of labor law."
"The broad sweep of this decision is certain to have numerous and profoundly negative economic consequences for hundreds of thousands of American businesses and millions of American workers," she said. "The abandonment of the definition of employer that has been a foundation of labor law will disrupt daily business operations in workplaces all over the country and stifle economic growth, job creation and innovation."
The board defended the decision, saying in a release that "its previous joint employer standard has failed to keep pace with changes in the workplace and economic circumstances."
Business groups countered that the decision was meant as a favor to labor groups, who have targeted retailers such as Walmart and franchise restaurants such as McDonald’s for unionization. Unions have run into obstacles because under the franchise model they have to organize on a store-by-store basis. The new standard could make it easier for unions to get a seat at the table by unionizing at the corporate parent level, according to David French, a vice president at the National Retail Federation.
"The NLRB’s decision disregards 30 years of clear precedent requiring a joint employer to have direct and immediate control over employees, and it unnecessarily blurs the distinctions between independent parties in a wide range of normal business-to-business relationships such as franchising or subcontracting," he said in a release. "This is further evidence that the NLRB has given up its position as an objective arbiter of workplace issues and sees itself as an advocate for organized labor as a means of imposing new workplace obligations and legal liabilities on well-known corporations."
The board’s two Republicans, including Harry Johnson, an outgoing board member, dissented from the decision, saying that there was no "limiting principle" for declaring joint employer relationships. The dissent also said that the board’s reliance on "indirect control," rather than overt control, was too vague.
"Anyone contracting for services, master or not, inevitably will exert and/or reserve some measure of indirect control by defining the parameters of the result desired to ensure he or she gets the benefit of his or her bargain," the dissent said. "Any degree of indirect or reserved control over a single term . . . may suffice to establish joint-employer status."
The majority argued that the decision will rein in corporations who try to avoid liability by subcontracting.
"It is not the goal of joint-employer law to guarantee the freedom of employers to insulate themselves from their legal responsibility to workers, while maintaining control of the workplace. Such an approach has no basis in the Act or in federal labor policy," the decision said.
"If our colleagues desired to return to a time when labor-management relations were insulated from third-party business relationships and competitive pressures, they would need to go back to our country’s origins," the dissent responded in a footnote.
Some labor experts said that the decision is a legal minefield for employers. Steve Bernstein, a labor attorney at Fisher & Phillips, called the new standard "unworkable."
"We can’t look at this decision in a vacuum. It comes on the heels of the [NLRB’s] quickie election rule during a time when unions can form in the blink of an eye. An employer’s best defense for minimizing such exposure has traditionally rested on maintaining employee morale, improving communications, and ensuring that employees have a voice in the workplace. With this decision, however, it seems that the lines are now more blurred than ever," he said in an email.
The decision takes effect immediately, though opponents are weighing a legal appeal in a federal court in Washington, D.C.