Federal Labor Ruling Divides Owners, Workers On Small Business Model

By Daniel Moore
Pittsburgh Post-Gazette.


Liz Szabo has spent many summers craving a healthy smoothie. Driving around Pittsburgh, the most common were sugary, calorie-ridden concoctions sold at gas stations and fast food joints.

In a burst of free-market inspiration, the lifelong Pittsburgher decided to start her own business selling what she loves. Szabo, 29, inked a deal with a Louisiana-based purveyor of fruit-blended drinks with more than 600 locations across the country.

Szabo’s story is similar to those of the hundreds of thousands of franchise locations nationwide. But just how independently she can make decisions in her new business was thrown into question in August after federal labor regulators determined franchise employees could negotiate directly with the parent company.

Put another way, companies that have expanded quickly through franchising stores and restaurants, think McDonald’s or Burger King, can be held responsible for the conditions that workers at those locations face on the job.

Business groups have argued the ruling threatens a model that for decades has promised a relatively quick and simple entry into local small business ownership for middle-class Americans. Workers unions have praised it, claiming employees now have a chance to bring workplace issues to what they say is the true employer.

Generally speaking, franchises emerge when a company grants a license to a third party to run one or more of its businesses under its brand name.

In return, franchisees are required to operate according to certain procedures and restrictions, which usually dictate the products or services offered, as well as pricing and geographic territory, according to the International Franchise Association.

The number of U.S. franchise establishments has swelled to 780,000, supporting 8.8 million jobs and supplying $890 million of economic output, according to a January 2015 report by IHS Global Insight prepared for the IFA. Employment growth in the sector has outpaced overall employment growth across the broader economy.

At least 80 industries have franchises in the Pittsburgh market, from hair salons to handyman enterprises to pet stores, said John Tubridy, management consultant for the Franchise Network of Pittsburgh, or FranNet. The Louisville, Ky.-based group offers free consultations, funded by franchisor industry, for aspiring franchise owners.

“It’s a business in a box,” Tubridy said.
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“It’s way for them to accelerate going into small business ownership because it gives them everything they want … It gives them the independence and also all kinds of support provided by the franchisor.”

Federal regulators have treated local owners as generally independent from the parent company. But in a decision issued Aug. 27, the five-member National Labor Relations Board voted 3-2 along partisan lines that Browning-Ferris Industries, a waste management company, should be considered a “joint employer” along with a staffing agency that provided employees.

The board said that its previous joint employer standard, set in the 1980s, had failed to keep pace with the explosive growth in employees working for such agencies, contractors and franchise owners.

Though a franchisor may not directly supervise workers at its franchises, board members considered the “indirect and direct control that BFI possessed over essential terms and conditions of employment” of the staffing agency “as well as BFI’s reserved authority to control such terms and conditions,” the statement read.

The ruling overturned a regional decision that the staffing agency was the sole employer of sorters, screen cleaners and housekeepers at a BFI recycling plant in California who had petitioned for union representation.

Wide-ranging business groups denounced the merging of responsibilities.

The Asian American Hotel Owners Association, whose members own 40 percent of all U.S. hotels, wrote, “It is clear to any honest observer that millions of small businesses would have never been started if the owner had known he would have limited authority over his employees, and that his staff would be ‘jointly employed’ by a corporation with no involvement in the day-to-day operations of the business,” the statement read.

Tubridy said the ruling “clouded” the franchise model and could make the opportunity less attractive.

“I would view it as support versus control,” he said. While franchisors issue guidelines for operation of franchise businesses, “the franchisor in my opinion doesn’t really have control over the business.”

The initial steps to becoming a franchisee seemed simple enough to Szabo. Last year, she called a number on Smoothie King’s website, completed a standard application, visited its New Orleans headquarters and tasted a few products. For her three locations, she wanted a drive-thru building in high-traffic areas.

But she couldn’t find anything. She was about to stop looking when the real estate agent employed by Smoothie King across the eastern United States called: He had found a spot.

Smoothie King also provided a Chicago-based public relations firm to assist with local marketing. When she hires employees the corporate office will send someone to help train them.

Szabo said it would be difficult to speculate how the NLRB ruling would affect Smoothie King. “The franchise model isn’t for everyone, but it was perfect for me,” she said. “We’re no different than any other small business.”

Bob Bell, owner of 10 Great Clips locations in the Pittsburgh area, ventured into franchising in 2005 after 25 years in corporate human resources. Because of his HR background, he said, he wrote his own employee manual.

“Great Clips corporate has nothing to say about the business with my employees,” Bell said. “That’s completely up to me. They have no say in it and they don’t want to have a say in it.”

The ruling did give heart to workers unions seeking access to the big companies that dictate underlying policies at franchise locations.

“McDonald’s is the boss, that’s true by any standard,” said Kendall Fells, an organizing director for the “Fight for $15” minimum-wage battle. “The company controls everything from the speed of the drive-thru to the way workers fold customers’ bags. It’s common sense that McDonald’s should be held accountable for the rights of workers at its franchised stores.”

A spokeswoman for the Service Employees International Union, which represents fast food workers and has funded the “Fight for $15” movement, declined to comment further.

But Vanessa Williamson, a fellow in governance studies at Washington D.C.-based Brookings Institution, said the ruling could help spur union membership.

“What unions have failed to do is convert the general desire for a union into a successful popular backlash against these measures,” Williamson said. “This is the difference between diffuse support, the kind readily captured by polls, and concentrated activism, the thing that can actually create change.”

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