Losers in NLRB ruling on franchises

As many Americans spent the tail end of their summers lounging at the beach or visiting family and friends, something very disturbing happened at one of Washington’s more bureaucratic agencies.

In a sweeping decision certain to leave a trail of devastating economic effects, the National Labor Relations Board upended one the most fundamental business relationships that exists in the United States – the franchise model. In a 3-2 vote in the case of Browning-Ferris Industries, the NLRB reversed more than three decades of established labor policy defining what it means to be a “joint employer,” broadening the definition to potentially include any business that contracts with other businesses, including America’s 780,000 franchises operated by families in every community.

While the NLRB’s illogical redefinition applies to businesses that contract for staffing, security or janitorial services (among others), it is particularly harsh on franchising – a business model that accounts for 9 million American jobs and has lifted more people from the working class to the middle class than any other business model. The new NLRB standard completely disrupts the franchisor/franchisee relationship by making franchisors liable for their franchisees’ employment practices, despite the fact that franchisors have no control over such practices.

The NLRB seemed to ignore the fact that franchise relationships are built on a division of roles and responsibilities – which is why the model is so successful. Essentially, the franchisor owns, represents and licenses the brand, and the franchisee owns and operates one or more locations as a licensee. At my company, CKE Restaurants, which includes Carl’s Jr. and Hardee’s, we are neither involved in franchisee decisions to hire, set wages or give benefits, nor do we have the contractual authority to be involved in those decisions.

And, that’s the point.

Families from diverse financial and cultural backgrounds invest money in America’s franchises precisely because they believe they can succeed using their own business acumen combined with the strength of the franchise brand. Franchisees are the quintessential independent entrepreneurs in this country, creating jobs and revenue for our state and national economies.

But, the NLRB’s misguided decision jeopardizes the entire model. By making franchisors joint employers with their franchisees, the franchisors are thus on the hook for any decision made by the franchisees. Not surprisingly, under these new circumstances, franchisors will begin to exert more control over their franchisees’ employment decisions.

The new risks are just too great. As the decision continues to shake out, franchisors will likely start taking a more active role in reviewing job applicants across the country, assessing hiring decisions before offers are made and advising on all compensation structures, bonus plans and so forth at individual locations. This will make people who were small business owners yesterday nothing more than corporate middlemen today.

Fortunately, some in Washington are thinking about the ugly consequences of the NLRB’s decision and moving quickly to nullify it before the damage is done. Bipartisan legislation, the Protecting Local Business Opportunity Act (H.R.3459), would reinstate the standard definition for joint employer that has worked so effectively for decades. Rep. Kevin McCarthy, a longtime defender of small business in California and a former small-business owner, understands this bill’s importance and is supportive.

Rep. McCarthy and many others are working to include similar language in the year-end omnibus spending package that must pass Congress by Dec. 11. I encourage Rep. McCarthy and our entire California delegation to do everything possible to make sure that happens.

California’s entrepreneurs and small-business owners are counting on it.