A Bad Obama Labor Rule, Resurrected

The Na­tional La­bor Re­la­tions Board dealt small busi­nesses a blow on Mon­day when it brought back an Obama-era de­f­i­n­i­tion of what con­sti­tutes an em­ployer. The re­ver­sal means that more com­pa­nies will be clas­si­fied as “joint em­ploy­ers” of their fran­chisees’ work­ers and con­tract staff, sub­ject­ing these busi­nesses to greater risk and stricter reg­u­la­tions. Con­gress should end this bu­reau­cratic med­dling by pass­ing the Save Lo­cal Busi­nesses Act, which would pro­vide clar­ity to small busi­nesses by re­in­stat­ing the old stan­dard.

Be­fore the Obama ad­min­is­tra­tion, the NLRB had long up­held a com­mon-sense de­f­i­n­i­tion of who is an em­ployer. For a “joint em­ployer” re­la­tion­ship to ex­ist, both com­pa­nies needed to “mean­ing­fully af­fect” the work­ers by par­tic­i­pat­ing in pro­cesses such as hir­ing, fir­ing, dis­ci­pline and su­per­vi­sion.

In 2015 an ac­tivist NLRB, dom­i­nated by Pres­i­dent Oba­ma’s ap­pointees, over­turned this prece­dent in its Brown­ing-Fer­ris decision. This rul­ing ex­panded the de­f­i­n­i­tion of an em­ployer to in­clude en­ti­ties with “in­di­rect” con­trol over job con­di­tions. This broad stan­dard threat­ened to up­end the en­tire fran­chise busi­ness model, as well as all other forms of con­tract­ing.

New NLRB mem­bers ap­pointed by Pres­i­dent Trump reversed this over­reach last De­cem­ber with the Hy-Brand rul­ing. But two De­mo­c­ra­tic sen­a­tors, Patty Mur­ray and Eliz­a­beth War­ren, con­vinced the NLRB’s in­spec­tor gen­eral that the board mem­ber who cast the de­cid­ing vote had a con­flict of in­ter­est, be­cause he had pre­vi­ously worked at the law firm that rep­re­sented the de­fen­dant in Brown­ing-Fer­ris. So now the Obama-era stan­dard pre­vails once more.

The de­f­i­n­i­tion of “em­ployer” isn’t a mere se­man­tic ques­tion. The NLRB’s de­ci­sion to re­vert to the 2015 de­f­i­n­i­tion puts hun­dreds of thou­sands of small busi­nesses and mil­lions of jobs at risk. As the for­mer chief ex­ec­u­tive of CKE Restau­rants, which owns Carl’s Jr. and Hard­ee’s, I saw first­hand how the fran­chise model em­pow­ers entrepreneurs, of­ten from hum­ble back­grounds, to achieve the Amer­i­can dream by be­com­ing small-busi­ness own­ers.

I also saw how a broad joint-em­ployer stan­dard would dis­rupt this model by mak­ing fran­chis­ers li­able for the count­less man­age­r­ial de­ci­sions their fran­chisees make each day. If a man­ager at one fran­chised Mc­Don­ald’s lo­ca­tion in Chat­tanooga com­mits a la­bor vi­o­la­tion, the fran­chiser could be sued even though ex­ec­u­tives at Mc­Don­ald’s head­quar­ters don’t de­cide which work­ers mop the floors in each restau­rant or how they’re com­pen­sated.

To pro­tect them­selves from law­suits, fran­chis­ers would be forced to in­crease their con­trol over every pid­dling la­bor de­ci­sion. Fran­chisees would be­come own­ers in name only, un­able to ne­go­ti­ate even their em­ploy­ees’ pay. Who would risk time and money in­vest­ing in a busi­ness they were un­able to man­age? Dis­cussing the Hy-Brand de­ci­sion on Wednes­day, White House bud­get di­rec­tor and for­mer restau­rant fran­chisee Mick Mul­vaney noted “the joint-em­ployer rule could be the . . . end of the fran­chis­ing busi­ness as we know it.”

Left stand­ing, this threat to the fran­chise sys­tem could also se­ri­ously dam­age the U.S. econ­omy. A re­cent re­port by the In­ternational Fran­chise As­so­ci­a­tion and Price­wa­ter­house­C­oop­ers states that as of 2016 fran­chise busi­nesses helped pro­duce 10.1% per­cent of all pri­vate non­farm jobs and 7.4% of all pri­vate non­farm gross do­mes­tic prod­uct. That’s huge.

The good news is that the Save Lo­cal Busi­nesses Act would pro­vide a leg­isla­tive fix by pre-empt­ing the NLRB. This is a bill that even to­day’s po­lar­ized Con­gress can pass; in fact, it passed the House last No­vember. In the Sen­ate, the bill’s job-cre­at­ing po­ten­tial should at­tract at least the nine De­mo­c­ra­tic votes needed to over­come a fil­i­buster.

Al­though Amer­i­cans of­ten have lit­tle re­course to dis­pute a de­ci­sion made by un­elected bu­reau­crats, this harm­ful em­ploy­ment stan­dard is one that law­mak­ers ac­tu­ally have a shot at fix­ing. Con­gress can pro­tect small busi­nesses and demon­strate its ef­fec­tive­ness in the process. But it must act fast be­fore too many minds drift from pol­icy to pol­i­tics.

Mr. Puzder is a board member of the Job Creators Network and author of “The Capitalist Comeback: The Trump Boom and the Left’s Plot to Stop It,” forthcoming in April.