A few weeks ago I wrote about the Save Local Businesses Act (H.R. 3441), which has passed the U.S. House of Representatives and is currently sitting in the Senate. At the heart of that Act is defining the term “joint employer” for National Labor Relations Board purposes, an issue with tremendous potential implications for the franchising industry, among others. If passed, the Act would codify a long-standing interpretation of franchisees as being the sole employer of their local employees. For reasons I explain in the previous post, that would be a good thing for preserving and facilitating the benefits of franchising.
Franchising is an important business model in the U.S. Franchised local businesses represent the fastest growing segment for employment, and are expected to continue that trend. Franchising obviously offers benefits for both the franchisor and the franchisee.
In a forthcoming paper in Cornell Hospitality Quarterly, Matt Sveum and I find evidence for at least one of the major benefits of franchising. Namely, franchising helps to reduce agency costs and to improve performance incentives at the local establishment level. From the abstract:
A central theme in much of the franchising literature is that franchising mitigates the principle-agent problems between the owner of the franchise company and the operator of the local establishment by making the operator the owner-franchisee of the establishment. Despite the centrality of that assumption in the literature, there is little empirical evidence to support it. We use Census of Retail Trade data for essentially all full- and limited-service restaurants in the US to test whether franchisee ownership affects performance at the establishment level. We find a strong and robust franchise effect for full-service restaurants, but little effect among limited-service restaurants. We argue this difference is consistent with agency costs given differences in work processes and the importance of managerial discretion.
Full citation:
Sveum, Matthew and Sykuta, Michael E., “The Effect of Franchising on Establishment Performance in the U.S. Restaurant Industry,” forthcoming in Cornell Hospitality Quarterly; US Census Bureau Center for Economic Studies Paper No. CES-WP- 16-54. Available at SSRN: https://ssrn.com/abstract=2883267 or http://dx.doi.org/10.2139/ssrn.2883267
No, I’m not referring to the hit 1980s sitcom that launched Alyssa Milano’s career and took Tony Danza from a dimwitted, cab-driving boxer (in Taxi) to lovable hunky housekeeper. It’s a more important question than that.
Who’s the boss at a local business? Especially if that business has close relationships with another, larger company?
That’s the question at the heart of the Save Local Business Act (H.R. 3441) that is currently waiting action in the U.S. Senate. And how that question is answered could have big implications for hundreds of thousands of small business owners. For starters, and perhaps most specifically, for every locally owned franchised business in the United States. But that’s not all.
The issue stems from a 2014 National Labor Relations Board (NLRB) ruling in which the Board voted 3-2 to find that McDonald’s Corp. was a “joint employer” with all of their franchisees. In that case, labor union activists filed a complaint against McDonald’s directly rather than having to work against multiple individual franchisees, claiming that because McDonald’s Corp provides training and recommends employment standards and work policies for the local business owners that use the McDonald’s brand, the franchisor is effectively a joint-employer. And therefore, any labor violations that can be levied against one joint-employer apply to the local business as a whole. The NLRB agreed.
Prior to this ruling, the NLRB treated local franchisee owners as the sole employer of the local business. That meant that any labor complaints had to be filed against each individual franchisee. By expanding its definition of joint-employer, the NLRB made it easier for labor groups to a) file complaints against and b) potentially unionize an entire franchise network.
two or more entities are joint employers of a single workforce if (1) they are both employers within the meaning of the common law; and (2) they share or codetermine those matters governing the essential terms and conditions of employment.
This is not just an issue for franchises (indeed, Browing-Ferris was not about a franchise case). In fact, the above definition could be read to mean that any company that hires another company to provide services could be considered a joint employer of the contracted company’ employees, even if only on a temporary basis as part of their otherwise full-time job. That includes anything from temp agencies to security companies to housekeeping or maintenance contractors; even to agricultural producers.
For instance, many farmers raise chickens or hogs under contract with a meat processing company. Those companies may require the farmer and any farm employees to follow certain routines or practices to ensure the health and well-being of the animals being raised. Under Browning-Ferris, one could argue the processor is a joint-employer with the farmer, making the farmer subject to a host of employment laws that typically do not apply to small businesses.
Local business owners breaking ground for their new franchised store, the first Sonic restaurant in Rhode Island.
Likewise with franchisees, whether owners of restaurants, hotels, tax preparation companies, cleaning companies, home healthcare companies, or retail outlets. Most franchisees are small, local business owners that pay the franchisor for the rights to use the franchisor’s brand name and business format, to gain access to training resources, and perhaps to access inventories and supplies. Because the franchisor provides training resources and may recommend things like staffing levels, training processes, etc., as part of their business plan (which is one of the reasons to buy the franchise in the first place), most franchisors could be deemed joint employers with their local business owner franchisees.
That creates new risks for franchisors (since they have no direct control over local store operations) and exposes small business owners to regulations that only apply to larger businesses. Moreover, it puts any franchisee at even greater risk for the behavior of other franchisees and their employees. And that is a powerful disincentive for franchising. Since franchised businesses have been the fastest growing sector of the economy, such regulations could have far-reaching implications.
Joint employer status creates new risks for franchisors (since they have no direct control over local store operations) and exposes small business owners to regulations that only apply to larger businesses. And that is a powerful disincentive for franchising.
Fortunately for now, a new presidential administration in 2017 led to a change in the composition of the National Labor Relations Board. The new NLRB board voted 3-2 to overturn Browning-Ferris and restore its previous definition of joint employer.
And therein lies part of the problem. Change presidents, change NLRB composition, change the rules. That is what the Save Local Business Act is intended to fix. The Act provides a legislative solution to the problem of agency (NLRB)) discretion in defining what constitutes a joint employer. Can laws change? Yes. But that requires more than a change of one person (as in the case of the NLRB) to change the law.
So who’s the boss? For now, it’s the local business owner. It’s up to Congress to remove the uncertainty about how that question will be answered in years to come.
o’s the boss at a local business? Especially if that business has close relationships with another, larger company?
whole. The NLRB agreed.