Senate Committee Hearing Examines Job Creation Under NLRB Joint-Employer Standard

By Joy P. Waltemath, J.D.

June 21, 2016

http://www.employmentlawdaily.com/index.php/news/senate-committee-hearing-examines-job-creation-under-nlrb-joint-employer-standard/

The Senate Committee on Small Business and Entrepreneurship held a hearing June 16 to examine the impact of the NLRB’s joint-employer standard on small businesses. According to Chair David Vitter (R-La), the committee has held numerous hearings this year “to highlight the need for regulatory reform in light of how federal agencies have issued new rules and regulations that cause undue burden on small businesses.”

In his published remarks, Vitter described the NLRB’s ruling in Browning-Ferris Industries that merely “indirect control” or even “unexercised potential” to control working conditions will now make two separate employers a joint employer. “This means that multiple employers will now have to jointly negotiate working conditions with unions and share liability for labor law violations,” he pointed out, noting that the ongoing litigation between McDonald’s and the NLRB over a joint-employer labor dispute is certain to have huge ramifications for many small businesses that operate as franchises.

“Despite the fact that franchisors are not responsible for hiring employees or even overseeing their day-to-day operations, they are still responsible for protecting the franchisee’s workers from any labor violations under the new standard that is being aggressively litigated by the NLRB’s General Counsel,” Vitter remarked, stressing the high level of uncertainty created by the NLRB’s decisions.

Franchise rule “Catch-22.” Testimony from Ms. Ciara Stockeland, Founder and COO, MODE, a discount retailer of designer fashions that operates under a franchise model, highlighted some of the challenges faced by franchisors under the joint-employer standard. She said that the Federal Trade Commission’s Franchise Rule requires her, as the franchisor, to exert significant control over her franchisees in order to qualify as a franchise and to ensure brand quality. The Franchise Rule operates in tandem with the federal Lanham Act, which requires persons holding a trademark to police and control third party licenses who are operating under the trademark (or brand name) to ensure brand consistency.

“Under these rulings, an action by a federal agency–such as the new joint employer standard–that prevents a franchise business from protecting its brand standards not only undermines the value of the owner’s trademark, it may also interfere with the small business owner’s ability to comply with the FTC’s Franchise Rule. Thus, on one hand, federal trademark law requires franchisors to protect their brand standards; but due to expanded joint employer policy, now federal labor law effectively prohibits franchisors from protecting their brand standards through any action or even potential action. What an extremely frustrating Catch-22 for small business job creators across the country.”

A modest decision. Mr. Keith R. Bolek, partner at the union-side law firm of O’Donoghue & O’Donoghue LLP, took issue with the hearing’s title: “The Challenge to Create Jobs under the NLRB’s New Joint Employer Standard.” He stated that the idea that the new standard will make it more difficult for small businesses to create jobs “is certainly not the case.” Rather, he characterized the Board’s decision as “a modest, carefully crafted decision that keeps pace with the evolving nature of employer and employee relationships.”

Not an attack on franchise model. More specifically, he called fears of the impact of the Board’s joint employer decision on various employer relationships other than the one at issue in that case “enormously overblown. The Board expressly stated that it was not addressing relationships such as contractor-subcontractor and franchisor-franchisee.” Bolek also pointed out that the General Counsel’s complaint against McDonald’s was made under the old joint employer standard because of evidence that “McDonald’s controlled the terms and conditions of employment for its franchisees’ employees to an extraordinary degree. Such control goes far beyond the typical franchisor-franchisee relationship.”

At the same time, Bolek emphasized that the General Counsel refused to issue a complaint involving the franchisor Freshii because it did not exert sufficient control over the terms and conditions of employment of the franchisee’s employees. “The differing treatment of McDonald’s and Freshii shows that the NLRB is not looking to upend the traditional franchise model, but to ensure that workers that choose to organize can meaningfully engage in collective bargaining where a franchisor decides to go beyond the traditional franchise model and exert control over the wages, hours, and working conditions of its franchisees.”

Business-to-business contracting at risk. Mr. James Sherk, a Research Fellow in Labor Economics at The Heritage Foundation, speaking on his own behalf, also testified at the hearing. Most of the media attention on the joint-employer standard has focused on its considerable implications for franchised businesses, he said, but his focus was on the equally large effect on non-franchise businesses. “This new standard will considerably impede business-to-business contracting,” he stressed, pointing out that the Board decision in Browning-Ferris itself had nothing to do with franchising but involved a standard businesses service contract. “Virtually all such contracts specify quality standards and prices. By law every company has potential control over another firm’s employees operating on their premises. The NLRB has ruled that these standard service contract provisions create a joint employment relationship. This will make business contracting significantly more difficult.”

Sherk suggested that the new joint-employer standard would undermine one of the major innovations in business management: the shift to having businesses focus on their core competencies and contract out for the services necessary to support these operations. “The NLRB’s new joint employer standard threatens all these business arrangements. ‘Indirect’ and ‘potential unexercised’ control are very vague and elastic terms that could encompass most business services contracts.” Consequently, businesses will no longer know whether contracting creates a joint employment relationship or not, Sherk pointed out, but if the NLRB decides it does, they will lose most of the benefits of business contracting, which he posited “will reduce American businesses’ competitiveness and their productivity.”

Threat to unionized contractors. Another point made by Sherk was that the new joint employer changes also threaten many existing unionized contractors, since the new doctrine “only has practical effects on contractors that are or may become unionized. It has little effect on businesses that hire non-union contractors. They would have no obligation to bargain over re-bidding their contracts. Nor would they have to engage in multi-employer collective bargaining negotiations. As long as employers do not do business with unionized contractors they do not risk semi-permanent entanglement with them. This will strongly incentivize firms to hire only non-union contractors, and to change contractors if they suspect their current contractor may unionize,” Sherk concluded.

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