Franchisors, franchisees must both be liable for labor violations

This week, Representatives Tom MacArthur (R-N.J.) and Henry Cuellar (D-Texas), published an op-ed in The Hill arguing that the Obama-era joint-employer rules in federal employment and labor laws hurt small businesses. They called the joint-employer standard a “perfect example” of an “illogical system of rules and regulations” that “steamroll” small businesses and highlighted franchisees in particular. 

But a closer look at those joint-employer standards reveals that they actually help small businesses, and their employees, by aligning the economic interests of franchisors and franchisees.

{mosads}The only entities that would benefit from a rollback of the Obama-era rules are powerful corporate franchisors, who want to be insulated from the costs of compliance and risks of employment and labor law violations, while still reaping the profits their small-business franchisees generate.  

The Department of Labor (DOL) and the National Labor Relations Board (NLRB) — two distinct agencies with separate responsibilities to enforce protections for working people — both have their own joint-employer standards, but the basic question they address is the same:

When two separate businesses together determine an employee’s terms and working conditions (i.e., the employee’s pay, hours, job duties), should both of those businesses be held accountable as joint-employers for complying with the employment and labor laws that protect the employee’s basic rights on the job? Or should only one employer bear all the costs and liability, while the other is shielded from liability and free to reap the profits?

As Macarthur and Cuellar wrote, franchisees are often small-business owners who pay the franchisor royalties so that the small business owner can “benefit” from access to the franchisor’s “tried-and-true business practices.” But recent high-profile scandals reveal that franchisees are left paying the costs of compliance and liability for wage and hour violations, while the corporate franchisor gets off the hook.

For example, from 2012 to 2015, DOL’s Wage and Hour division completed over 800 compliance actions against Subway franchisees for wage and hour violations, resulting in more than $2 million in back wages for more than 6,000 workers. Yet the corporate franchisor, Doctor’s Associates, Inc. (doing business as Subway, Inc.) raked in over $1.1 billion in revenues each year during 2013, 2014, and 2015, according to its franchise disclosure document.

Why should the small-business franchisees be the only ones on the hook for the $2 million liability to Subway employees who were underpaid, while the corporate franchisor is raking in billions?   

Similarly, the controversy over Trump’s original labor secretary nominee — Andy Puzder, then-CEO of Hardee’s and Carl’s Jr. parent corporation CKE Restaurants —brought national attention to reports of widespread wage and hour violations by Hardee’s and Carl’s Jr. franchisees. CKE deflected by blaming the violations on its franchisees’ stores, but worker advocates argue that CKE fostered a culture that encouraged violations.

Immunity from the responsibility of complying with employment law has not caused corporate franchisors to be better stewards to the small business owners or the employees who wear uniforms bearing the corporate logo. Indeed, franchisees are pressured to keep labor costs down, which encourages violating wage and hour laws. Former DOL Wage and Hour Division David Weil told Bloomberg that the franchise structure creates direct “incentives for noncompliance.”

Those who oppose using the joint-employer standards to bring the big corporate name to the table have rallied around the message that it would hurt small business owners. Indeed, as MacArthur and Cuellar wrote, “small businesses are merely asking us to uphold the standard that has worked well for more than three decades in providing fairness.”

But small business franchise owners should ask themselves: How is it fair to them to allow the big corporate franchisor to reap the profits from the franchise, while being shielded from liability for any of the risks of noncompliance? 

If Congress truly wants fairness for small business owners, then they should advocate for a policy solution that would put franchisors’ economic incentives on par with their franchisees. If franchisors know they are on the hook as joint employers for their franchisees’ labor and employment law violations, then the big powerful corporate franchisors will have a big powerful incentive to make sure those costly violations cease.

Holding franchisors accountable as joint employers with their franchisees will help ensure that good jobs are being created by the franchising model, and that their employees — our neighbors, classmates and family members — will be paid fairly for their labor.

Abolishing the joint-employer liability rules only serves to insulate franchisors from sharing the risks of business, which is not fair to small businesses and certainly does not help employees.

Marni von Wilpert is associate labor counsel supporting the Economic Policy Institute‘s Perkins Project on Worker Rights and Wages, a policy response team tracking the wage and employment policies coming out of the White House, both houses of Congress, and the courts.

The views expressed by contributors are their own and not the views of The Hill.