Smoothie Cafe, McDonald’s, Domino’s, The Honeybaked Ham Company, Kiddie Academy, Celebree Schools, JiffyLube, FastSigns, Jazzercise, and more are just a handful of household business names that you have seen and perhaps patronized. They are franchise businesses owned by individuals from all walks of life. 

Franchises make the dream of entrepreneurship a reality for men and women of varying ages, ethnicities, and educational and socio-economic backgrounds. 

However, the Biden administration is on a path to undercut the franchising model. New regulations will increase liabilities for franchises leading to increased costs and burdens on small businesses in the future.

What Happened

Last week, the National Labor Relations Board finalized a rule that significantly expands when employers will be deemed a joint employer under the National Labor Relations Act. 

This new rule, which replaces a more favorable standard for franchises adopted under the Trump administration, would classify companies (such as franchisees and contractors) as an employer if they control basic conditions of work (even if it is indirect or not exercised) such as pay, scheduling, hiring and firing, and supervision. 

Advocates think this rule is a win for labor rights. Instead, it slaps franchisors with liability for labor law violations by their franchisees and contractors even if they are not involved in the day-to-day operations of those franchises and contractors. The outcome will be less independence for franchisees over their businesses, increased fees and costs for franchisees, and increased liability for franchisors. In the long run, the barrier to entry will be raised for new franchises eliminating it as a path to opportunity and mobility. 

The response from the business community has been sharp and loud. The International Franchise Association (IFA) has been a leader in this issue:

IFA’s continued:

Nearly a third of franchise owners say they would not own their own business without franchising, and this attack on the franchise model would shut the door of opportunity to thousands of would-be entrepreneurs.

The National Retail Federation expressed alarm:

The NLRB’s new rules will have a detrimental impact on the retail community as it creates ambiguity within the employer-employee relationship, inhibiting both job growth and free enterprise.

…

Simply put, the new standard is unclear, unnecessary and harmful to thousands of retail employers and the millions of Americans they employ.

Beth Milito, Executive Director of the National Federation of Independent Business’s Small Business Legal Center explained the financial compliance costs that would be imposed on small businesses:

The arbitrary standards outlined in this rule will make compliance a nightmare for small business owners who do not have the teams of lawyers, accountants, and compliance staff needed to navigate these vague and subjective definitions. 

The Chamber of Commerce spoke out about the expected “chaos and more legal confusion that will harm both employers and workers” from this rule.

This rule is expected to be challenged in federal court. In the meantime, lawmakers are exploring using legislative means to undo this rule.

Bottom Line

Franchising affects thousands of small businesses and millions of workers many of whom are women, minorities, veterans, and immigrants. The joint-employer rule (like other Biden labor regulations) is not a win for labor, but a loss for opportunity and free enterprise.