Study: Anti-Franchise Rules Killed 375K Jobs Since 2014

Litigation costs nearly doubled

A sign outside a San Francisco McDonald's
A sign outside a San Francisco McDonald's franchise / Getty Images
January 29, 2019

An industry study found that the Obama administration's crackdown on franchising has cut hundreds of thousands of job openings and dealt a $33.3 billion blow to the economy each year dating back to 2015.

A report put out by the International Franchise Association and a Chamber of Commerce found that the Obama administration provoked an "existential threat" to the franchise model in which small business owners operate under the umbrella of a national corporate brand. The Obama administration departed from decades of precedent when the National Labor Relations Board held that parent companies could be held liable for labor violations committed by franchisees. The report estimated that the new joint employer standard set curtailed expansion in the industry, leading to between 142,000 and 376,000 lost job opportunities—a 2.55 to 5 percent reduction in the workforce.

"All of this economic cost was predictable and avoidable," IFA spokesman Matthew Haller said. "Franchise owners have incurred significant losses."

The study was conducted by the Chamber of Commerce's Dr. Ronald Bird, who served as chief economist at the Labor Department during the Bush administration. Bird said the industry had already witnessed a "chilling effect" that has caused parent companies to rein in their growth plans and ramp up litigation costs. Franchisees have suffered the most under the Obama era rules, as many now face heavier legal costs to stay in business. Litigation costs grew 93 percent in the industry and the nation's 233,000 franchisees have lost an average of $142,000 in revenue, according to the report.

"Businesses react to fear and uncertainty," Bird said. "They're taking the course of greatest caution and that's causing this pullback ."

The Trump NLRB has turned to rulemaking to solidify the previous joint employer standard, which only held parent companies liable if they were directly involved in a violation. A previous decision overturning the Obama agency ruling was dismissed after an ethics official said Trump appointee William Emanuel should have recused himself because his old law firm handled joint employer cases. Bird and Haller said the effects of the regulation would not immediately reverse the damage caused by four years of uncertainty, but would be a first step to helping the industry begin creating new job opportunities and expand existing hiring.

"There is the opportunity to this [Trump NLRB] regulation to remove much of that source of fear and to remove the uncertainty—that is the minimum first step to recovering and removing these costs," Bird said.

The report featured 77 one-hour interviews with lawyers, franchisees, and franchisors of all different sizes across the country. IFA has submitted the report to the NLRB as part of the public comment period for the rule proposal. The agency will begin reviewing these comments and all replies by Feb. 11.