Last July, the National Labor Relations Board (NLRB) Office of the General Counsel issued a statement affirming charges alleging McDonald’s franchisees and their franchisor, McDonald’s, USA, LLC, with violating the rights of employees as a result of activities surrounding employee protests. The statement went on to suggest that McDonald’s may be in violation of the National Labor Relations Act (NLRA). In effect, the NLRB could determine that employees of McDonald’s franchisees are also co-employees of McDonald’s USA.
The NLRB is tasked with enforcing the NLRA, a 1935 law that was designed to encourage the practice and procedure of collective bargaining and by protecting the exercise by workers of full freedom of association, self-organization, and designation of representatives of their own choosing, for the purpose of negotiating the terms and conditions of their employment or other mutual aid or protection. However, according to many business groups, rather than protecting workers, the NLRB has used its enforcement powers to harass and burden employers.
While it is up to the political process to determine if the NLRA should stay on the books, and how the NLRB should enforce the act, it is clear that rulings from this unelected body can have tremendous costs on the economy. In this week’s edition of REGonomics, we examine the recent opinion that franchise companies may have to take responsibility for the employees of franchise operators.
Consumers Could See Price Increases of $33.5 billion if Franchise Companies Are Required to Co-Employ Franchisee Employees
Franchising is the practice of leasing for a prescribed period of time the right to use a firm’s successful business model and brand. It allows a firm to construct a chain of outlets to distribute goods and services with a minimum of liability and investment. Essentially, the franchisor is a supplier who allows the franchisee to sell its goods, use its trademarks and business model and enjoy economies of scale and scope that could not be realized by an individual operation.
The concept of franchising has been around for hundreds of years. In fact, much of the medieval economy was based on the concept of a royal franchise, where the sovereign granted the right to farm land, or brew beer, or tend sheep to a local peasant or merchant. More recently, Isaac Singer, whose company began mass production of sewing machines after the Civil War, began to license out servicing, repairs and sales to local merchants around the country. Singer’s use of a contract for this arrangement introduced the earliest form of franchise agreements, and the first modern franchise system was born. Since that time a wide range of businesses, from automobiles (who grant dealer franchises), to hotels, to food-service establishments, to soft-drink manufacturers, have adopted a franchise model and have used this model to help develop large national or regional brands.
According to the International Franchise Association, in 2007, franchised businesses accounted for 9.1 million jobs in the United States, paid their workers $304.4 billion, and produced over $802.2 billion in economic output. This is a substantial industry, but how would it be impacted if the franchisor were to become a co-employer?
In some cases, it would not matter at all. In fact, franchisors owned about 14 percent of franchise operations in 2007, so about 14 percent of all employees would not be impacted. But, and this is assuming that the size of the industry is still about the same, that would still mean that almost 7.9 million employees could be impacted by this decision. Based on the figures provided by the IFA, and wage rates from the Bureau of Labor Statistics, the increase in labor costs that could result from a NLRB ruling against the franchise industry would be as high as 13 percent. Factoring in the non-franchisee operations and the percentage of total costs resulting from wages, the impact on consumers could be as high as 4.2 percent. In other words, were the NLRB to rule that employees of franchisee’s are co-employees of the franchising company, costs to consumers could increase by 4.2 percent, or in this case by $33.47 billion. Considering that this is based on data from 2007, the costs could be considerably higher today.
In 1935, during the middle of the Great Depression, when lock-outs were common, the poverty rate was nearly 50 percent and unemployment was as high as 25 percent, it was probably reasonable economic and social policy to protect unions and workers. In today’s knowledge based economy, where workers are not generally monotonic cogs in a big machine, labor laws are being used more and more often to harm and harass business and job creators. There is a cost to this that is passed on to consumers – and in fact the workers themselves. In this case, the cost could be in the billions of dollars. Over-regulation is one of the greatest problems facing business in America today, and governments that leave ancient laws on their books are not helping.
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