This Overlooked Labor Rule Could Be a Huge Drag on U.S. Businesses

Sports Authority closing
Shoppers walk up steps to enter a closing Sports Authority store in Corte Madera, California, U.S., on Tuesday, May 24, 2016. David Paul Morris/Bloomberg via Getty Images

On May 10, 13 Democrats in the House of Representatives sent a letter to the National Labor Relations Board (NLRB) expressing concerns over the agency’s expansive and vague standard for determining when two U.S. businesses are considered jointly liable for labor violations. Since the new standard was issued in 2015, the NLRB’s message to employers is as clear as it is troubling: Hire people in-house and stop working with small businesses, contractors, and franchisees.

The NLRB is a powerful five-member independent agency that governs private sector labor relations, originally set up to represent the public interest in labor disputes. But the agency’s actions on matters like joint employer liability undermine that purported mission by threatening to upend thousands of business-to-business relationships, impacting millions of employees in the process.

Already, 54 Republican and three Democratic representatives were concerned enough to urge House appropriators to defund implementation of the 2015 ruling that imposed the new standard. That controversial ruling stemmed from a case against waste management company Browning-Ferris Industries, which hires contractors to help sort recyclable garbage. Previously, a company like Browning-Ferris would only be held responsible for labor violations concerning employees whose work conditions it directly controlled, while contractors would be responsible for their respective employees. But now, Browning-Ferris—and potentially thousands of similarly situated companies nationwide—may be held liable for labor violations committed by other employers it contracts with, even if Browning-Ferris exerted no direct control over the work conditions of the other employer.

That’s bad news for the American economy and jobs. Since the recession, small businesses have accounted for 67% of net new jobs. Franchises directly and indirectly account for over 13 million jobs, while outpacing the rest of the economy in employment growth. Since the recession, the franchise industry has been a bright spot for U.S. job growth. From 2012 to 2016, franchises created 10.9% of new private sector jobs.

Under the new joint employer standards, franchisors will face pressure to mitigate the rising cost of doing business. They may directly operate more stores, forgo expansion plans, close stores, decrease franchising opportunities, or increase the entry cost for franchisees. Looking ahead, there’s bound to be a ripple effect. Fewer entry-level job opportunities hurt workers now and into the future, because an early start in the workforce is crucial to future success. Research shows that when young people get early work experience, they tend to earn higher wages in the future, and many get their first work experience at franchise establishments like McDonald’s, KFC, Subway, Taco Bell, or Baskin Robbins.

The new joint employer standard is bad news for would-be entrepreneurs, as well. A franchise business arrangement allows people who might not already have the know-how to start a business from scratch to be their own boss. Franchisors provide franchisees with the benefit of an established brand name, marketing, and reliable business methods.

Another big problem with expanded employer liability that many companies may not have started to consider is higher insurance premiums. Employers purchase employment practices liability insurance for protection against wrongful termination lawsuits and other employment-related lawsuits. Premiums are normally based on how many workers a company employs. But now those premiums will certainly rise when that head count is abruptly (and artificially) inflated.

Ultimately, the NLRB’s new joint employer standard will mean reduced opportunities for entrepreneurs and hardworking Americans. The only saving grace is that the NLRB decision is not fully in effect yet; it is being challenged in court. It is now up to the courts or, better yet, Americans’ elected representatives in Congress, to stop regulators from wreaking havoc on American businesses and workers.

Trey Kovacs is a labor policy expert at the Competitive Enterprise Institute.

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