An Obama Labor Ruling That Threatens Small Businesses

The case rewrote decades-old law. It involved a contractor, but franchises may be even harder hit.

 
 
Newspapers being recycled at Browning-Ferris Industries in Brocton, Mass., 1995.
Newspapers being recycled at Browning-Ferris Industries in Brocton, Mass., 1995. PHOTO: ASSOCIATED PRESS
 

A top goal of President Obama’s National Labor Relations Board was to make union organizing easier. With this objective in mind, the board subjected countless employers to unprecedented bargaining obligations and legal liabilities.

In 2015 the NLRB considered whether Browning-Ferris Industries, a recycling company, was an employer of workers provided by the staffing agency Leadpoint Business Services. Leadpoint hired and trained the workers, determined their wages, and retained direct and exclusive control over their supervision, discipline and termination. But if Browning-Ferris also was considered their employer, the company would have to bargain with the local Teamsters union and would become liable for Leadpoint’s employment practices. The board ruled 3-2 that Browning-Ferris and Leadpoint were “joint employers.”

According to a standard established in 1984, a joint employer had to have direct and immediate control over hiring, firing, supervising and directing employees. The NLRB found Browning-Ferris was a joint employer by changing the standard so that indirect control—mere influence over someone’s employment—was enough. Such influence could manifest itself, for example, in provisions of the parties’ staffing agreement that called for drug testing or performance standards. 

Wrapping itself in the mantle of workers’ rights, the NLRB claimed that complete bargaining would be impossible unless companies like Browning-Ferris were forced to the table. Never mind that Congress—undoubtedly aware of third-party business arrangements when it passed the National Labor Relations Act of 1935 and substantially amended it in 1947—defined an “employer” as a company that directly and immediately controls hiring and firing.

A principal target of the NLRB’s decision is the franchise industry, with its nine million workers in 801,000 franchise operations, according to a September 2016 report from PricewaterhouseCoopers. A company sets operating standards for its franchisees to protect its brand, making them joint employers under the NLRB’s new ruling. Instead of organizing franchise by franchise, unions will use a franchiser’s newly minted liability for the unfair labor practices of its franchisees, engage in economic protest activity against it, and threaten similar skirmishes around the country, strong-arming the franchiser into agreeing to the unionization of all its franchises. That’s how the Service Employees International Union hopes to unionize McDonald’s .

To avoid the risk of joint employer liability, companies will move away from using independent franchises to sell their products or engage in costly oversight of existing franchise operations. Buying a small franchise will become less attractive for entrepreneurs, and smaller companies that can’t afford oversight costs will be driven out of business. A 2016 survey conducted by Frandata, a franchise-industry researcher, estimates that business failure, downsizing and the declining rate of new franchise business formation may result in the loss or failure to create as many as 600,000 jobs over two years.

The NLRB’s decision will be felt across the economy as companies like Browning-Ferris dispense with efficiency-boosting contractors. Small-parts manufacturers, security companies and janitorial agencies will find their services are no longer needed.

The Browning-Ferris decision is a carefully calculated effort to enhance union power, not a saintly attempt to help workers. Microsoft learned this firsthand. In 2015 a union representing one of its suppliers’ employees filed a charge accusing the company of unlawfully refusing to bargain. The justification? Microsoft’s social-responsibility initiative required large suppliers to provide 15 days paid annual leave to its employees. On the basis of the bare allegation that Microsoft was a joint employer, the NLRB’s general counsel filed an intrusive discovery request on behalf of the union that the board refused to quash.

A challenge to the NLRB’s decision is pending in the U.S. Court of Appeals for the District of Columbia Circuit. But the surest way to undo the Browning-Ferris decision is for Congress to pass the Protecting Local Business Opportunity Act, which reverts to the earlier standard of what constitutes a joint employer. President Trump’s board could reverse the decision, but that would take time and could itself be reversed by another president’s board.

A thriving economy needs the energy and job-creating capability of millions of franchises and other small businesses. When the NLRB’s perceived constituency—the labor movement—controls the agenda, balance is thrown out the window, and a union’s interests take priority over the nation’s.

Mr. Schaumber, a former chairman of the NLRB, was appointed by President George W. Bush and served from 2002-10.

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