I’ve Spent Half a Century Witnessing Power of the Franchise System. This NLRB Decision Threatens It.
Want to achieve the American Dream of becoming a small business owner but don’t want to spend years establishing your brand? Then the franchise system is for you.
If you’re not familiar with the franchise system, it’s difficult to understand just how powerful it is. For a small fee and percent of revenues, almost anyone can immediately become a small business owner of an established brand that will attract customers based on reputation and marketing. Other than following basic product offerings and quality control, franchisees have complete say over their business. In return, franchisors get to see their brand grow.
This win-win relationship has made the franchise system one of the most successful business models in U.S. history. It is responsible for 13.3 million jobs and $1.6 trillion of GDP. As the former president of McDonald’s and current chairman of FAT Brands Inc., I’ve had a front-row seat to the franchise model’s success over the past half century.
That’s why I’m concerned about a decision made last month by the National Labor Relations Board to return to what’s known as a “joint employer” standard. This quirky definition of employer could undermine the franchise business model. To protect it, Congress must preempt the NLRB’s meddling by passing legislation that defines an employer as it’s commonly understood. The Save Local Business Act, which already passed the House of Representatives last November, would do just that.
The 1935 National Labor Relations Act defines an employer as the entity exercising direct control over wages, benefits, and working conditions. Subsequent NLRB rulings have clarified that an employer “meaningfully affects matters relating to the employment relationship such as hiring, firing, discipline, supervision, and direction.”
This longstanding employer definition precedent was overturned by President Obama’s NLRB with its 2015 Browning-Ferris decision. In a 3-to-2 decision along party lines, it expanded the employer definition to any entity that could exercise indirect control over the terms of employment.
This threatens the franchise model because under this definition franchisors could be considered joint employers with their franchisees’ employees. This would make them liable for the thousands of daily employment decisions made by what are independent small business owners. It’s a win for trial lawyers but a loss for the American small business community and national economy.
That’s because under this joint employer definition, franchisors will be forced to cut franchise opportunities to those who haven’t demonstrated a long record of franchise success. The liability risk of franchising to someone trying to achieve the American Dream will be too great.
This will hurt minorities, who disproportionately use the franchise system, the most. Minority neighborhoods and minority jobseekers will feel the aftereffects. Those lucky enough to still secure a franchise under this joint employer standard will see their responsibilities curtailed as franchisors are directed by general counsel to take on a more active role in an attempt to prevent lawsuits. Being a glorified manager is not what franchise owners I’ve met over the years signed up for.
Last December, President Trump’s NLRB overturned the Obama-era joint employer standard. But Sen. Elizabeth Warren was able to convince the Inspector General that the decision was made under a conflict of interest because the deciding vote was cast by a former employee of the law firm that opposed the Browning-Ferris decision. Apparently, the IG isn’t bothered by Elizabeth Warren’s truckload of campaign contributions from the big trial law firms in the country.
There’s hope to fix the employer standard by passing a more permanently solution in the legislative branch. The Save Local Businesses Act just needs to pass the Senate.