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.