Some Small Businesses Curb Expansion, Citing New Labor Law

Chuck Stempler, owner of an AlphaGraphics printing and marketing franchise, is concerned that he could ‘lose’ his ability to control his business. ENLARGE
Chuck Stempler, owner of an AlphaGraphics printing and marketing franchise, is concerned that he could ‘lose’ his ability to control his business. Photo: Ted S. Warren/Associated Press

Small-business owners say they are shouldering higher costs and scaling back expansion plans because of a revised federal rule that gives employees more leverage in settling workplace grievances.

The new policy, intended to hold businesses accountable for labor-law violations against people whose working conditions they control but don’t claim as employees, was put in place last year through a ruling by the National Labor Relations Board, which referees workplace disputes and oversees union-organizing elections. The rule, expected to affect fast-food, construction and other industries reliant on contract workers and employees of franchisees, also aims to ensure workers can unionize and collectively bargain with businesses that help control their fates.

Some businesses “want to have active involvement in the determination of terms and conditions of employment and in the direction of the employees at work, but they don’t want to take responsibility for it,” said Richard Griffin, the NLRB’s general counsel.

The policy broadens the circumstances in which two businesses can be counted as employers of the same group of workers, reversing the NLRB’s 30-year-old standard for determining such “joint-employer” status.

The agency is now beginning to rule on a body of test cases that could detail how the standard will apply, but some businesses—particularly those in the franchising industry—have started making decisions based on potential outcomes, underscoring how just the prospect of a regulatory change can impact U.S. workplaces.

The change could pull franchisers—ranging from big brand companies such as McDonald’s Corp. MCD 0.66 % and Golden Corral Corp. to smaller operations—into labor disputes involving workers at their networks of independent owner-operators, or franchisees. The brand companies face the risk of having to pay back wages to workers fired for protesting low pay or trying to join a union; the companies also could be swept into collective-bargaining talks alongside store owners they say have total control over the workers at the stores.

Franchisees, meanwhile, say they could lose their independence to hire, fire and manage workers as they please. They are also concerned about becoming too independent: Some say their franchisers have scaled back worker training tools and other guidance, fearing regulators would view such involvement as joint-employer-like control.

Businesses say they are in a regulatory limbo because the new standard is vague about what constitutes control.

The previous test measured the direct control one business had over working conditions of people employed by another business. Now, even indirect control can count.

So far the impact seems to be largely on the franchisees. A home health-care business in Wisconsin is taking on $ 10,000 in annual recruiting costs because its franchiser stopped providing assistance to steer clear of regulators, and a small hotelier in Florida is abandoning expansion plans in small markets because one of its franchisers scaled back worker training it provides. A printing business owner in Washington state said he canceled plans to open an eighth store because he doesn’t want to risk the investment until it is clear his franchiser wouldn’t be considered a joint-employer.

“I could lose my ability to control my business,” said Chuck Stempler, an owner of the seven printing stores that operate under the AlphaGraphics brand in Washington and California.

At issue is who qualifies as an employer of certain workers amid economic change that regulators say can undermine workers’ rights to fair pay, benefits, or union organizing. Regulators say they must be more vigilant in protecting workers as companies rely more on contract work and other fractured working arrangements that can leave employees unsure who is responsible when problems arise.

Employers say the NLRB is confusing control with contractual relationships that help businesses and workers thrive.

“The NLRB is applying a new legal standard that would undermine a successful American business model that has enabled thousands of families to operate their own small businesses and help support millions of American jobs,” McDonald’s said in a statement, referring to the franchising business.

The agency has already issued joint-employer complaints alleging McDonald’s and its franchisees violated rights of restaurant workers who participated in union-backed activities to improve pay and working conditions. McDonald’s said it would fight the allegations.

An analysis conducted by labor and employment law firm Littler Mendelson found that more than 50 joint-employer charges have been filed against franchises since Sept. 1, most against McDonald’s and a variety of hotel and janitorial businesses. The law firm said more than 80 other charges against franchise businesses could lead to joint-employer complaints, mostly in the fast-food and third-party staffing industries. In addition, nearly 150 more joint-employer charges were filed against non-franchised businesses, most of them filed by unions or union-affiliated groups, the law firm found.

Shelly Sun, co-founder of BrightStar Care, a Chicago-based franchiser that provides home health-care services through its network of more than 300 franchisees, used to help the businesses talk through employment problems, such as difficult employees. Now, “we refer them to a human resources attorney,” she said.

Her company also stopped paying to host an online system where franchisees could post job openings and screen applicants, Ms. Sun said.

BrightStar franchisees Susan Rather and her husband Jeffrey Tews have since established their own system for $ 10,000 a year. “That sort of thing will impact the bottom line,” said Ms. Rather, who together with her husband owns four BrightStar home-care locations in Southern Wisconsin.

Mr. Griffin of the NLRB said the franchising community is overreacting. He noted that the case that resulted in the ruling last year overhauling the standard involved a subcontracting relationship, not a franchising one.

Write to Melanie Trottman at [email protected] US Business

About The Author