It’s a business model that has become as American as an ice cream cone at a drive in stop, or a hamburger at your favorite fast food shop.
The franchise model of business has allowed large numbers of Americans to become business owners, and has provided jobs to extraordinary numbers of people who might otherwise face unemployment or may never have had a chance to enter the job market at all. The Competitive Enterprise Institute notes that “minority-owned franchise businesses succeed at a rate 46 percent higher than that for minority-owned non-franchise businesses.”
But it is a formula that is under attack on two fronts. Attempts to increase the minimum wage to $15, and a legal maneuver that would raise liability for franchisors to the extent that it would make the entire franchise model a non-viable business model, may bring an end to this successful part of the U.S. economy.
USNEWS reports: “The franchise business model that has flourished for over two generations is under attack. The Service Employees International Union, as part of a national campaign to bolster its membership and finances, is leading an assault on franchise businesses. If the unions prevail, nearly 800,000 small business owners who employ more than 8 million workers could face economic uncertainty, even bankruptcy, and thousands of other would-be entrepreneurs could be deterred from pursuing their dreams and creating additional jobs, according to a recent industry report; meanwhile, franchisees are expected to create nearly a quarter million new jobs in 2015 alone. In addition, the franchise model, which involves less risk than that typically associated with a small business startup, has been especially attractive to aspiring women and minority entrepreneurs. Around 20 percent of franchises were owned by minorities in 2007, compared to 14.2 percent of non-franchised businesses.”
The Daily Signal concurs: “Legal experts worry that the franchising model could become extinct. The stakes are huge because by the end of this year, the more than 770,000 of these independently owned franchise stores nationwide are expected to employ more than 8 million workers. More than 31,000 automotive businesses, more than 155,000 fast-food restaurants and nearly 90,000 real estate businesses are part of this model.”
The minimum wage dispute is fairly simple: those representing workers want to force owners to provide substantial wage hikes, while business owners worry that those hikes will wipe out their profit margin and force them out of business. But the liability issue is more akin to a law suit strategy that seeks to incorporate as many “deep pockets” as possible into an action in order to gain the largest recovery, even if many of the parties dragged into the law suit have no real connection to the issue at all.
It would work like this: if an individual who works for a franchisee gets injured, he would not only be able to sue the owner of the franchised business he works for, but also the entire parent franchise company. That liability would shake the entire franchise industry to the core, as it would provide almost unlimited liability.
Forbes analyzes it this way: “The real objective for trial lawyers is to bring in another set of deep pockets for the phase of the case in which they attempt to prove the amount of punitive damages that should be awarded,” Oncidi [ a partner in a Los Angeles law office who focuses on labor and employment law] said. “They would much rather have a punitive damages award based on the income and profitability of the franchisor rather than just that of the franchisee.”
The legal theory being proposed by critics of the franchise industry, including the National Labor Relations Board and the Service Employees’ International Union, is called “joint employment,” which would define a franchisee worker as being employed not only by the franchisee but by the entire parent franchise company as well.
Alyosius Hogan of the Competitive Enterprise Institute explains the issue:
“National Labor Relations Board (NLRB) cases involving three different companies could upend…business practices by radically redefining what constitutes a joint-employment situation—when an employee is considered jointly employed by two businesses. The joint-employer cases threatens to overturn decades of established precedent, upsetting the expectations of thousands of businesses that have relied on the current rules in developing their business models. These cases involve major American businesses—McDonald’s, CNN, and Browning-Ferris Industries (BFI), to list but a few—and regular American citizens across the nation would be harmed.
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“NLRB General Counsel Richard Griffin and U.S. Department of Labor Wage and Hour Administrator David Weil are pushing a radical redefinition of ‘employee.’ Their goal is to give unions greater leverage against the businesses they seek to organize, by turning many American workers’ employment by one company into simultaneous joint employment by two or more companies. The effect would be to add an additional, usually larger, employer to the collective bargaining table for negotiating wages, safety, and benefits…
“Currently, businesses jointly employ a worker when their actual practices involve sharing substantial, direct, and immediate control over hiring, firing, discipline, supervision, and direction. General Counsel Griffin seeks to expand the definition of joint employer to include direct or indirect or unexercised potential control, as well as broadly defined “economic and industrial realities”—a fudge factor that would cover most businesses simply by claiming one party is essential to the collective bargaining process.
“The NLRB’s proposed change would decimate the “bright-line” clarity of the past 30 years of law in this area. Under the Griffin-Weil plan, workers employed by franchisees, staffing agencies, contractors, and suppliers would typically become joint employees of the franchisor, lead company, or manufacturer, but the assessment would be highly speculative and specific to the situation. And the NLRB is sure to find whatever outcome benefits unionization appropriate.
“Furthermore, the NLRB is using sly means to impose this new definition of joint employment. Rather than issuing a rule, the Board will simply exploit its ability to decide the cases it prosecutes. Utilizing case law evades a number of congressional checks and balances to administrative rulemaking power.
“Substantively, joint employment has major consequences.
“First, joint employers can be sued more readily because they share liability for an employee’s actions. More parties and deeper pockets to sue translate into more business costs and hampered job growth.
“Second, joint employers are unionized more easily because both businesses must negotiate with a union. To unionize one business is effectively to unionize the other. Recent research shows that unionization means a 15 percent wage loss for workers and, for publicly traded companies, a reduction in overall valuation by as much as 14 percent.
“Third, Griffin and Weil intend to give unions “economic weapons”—pickets, protests, and boycotts—that have been prohibited for use against the third parties that would be redefined as joint employers. Unions then could pressure third parties into labor peace agreements—which grant union recognition via signed cards rather than secret ballots, give unions access to business premises, and prevent employers from opposing union organizing—in exchange for unions not deploying their weapons.
“Fourth, the NLRB’s proposed joint-employer standard would force major employers to bring more services in house, leaving small business with fewer opportunities. The NLRB’s efforts to expand the definition of joint employer seek to aid unions’ organizing efforts by exploiting large companies’ sensitivity to attacks upon their reputation. Weil’s top-focused strategy, which the NLRB is pursuing, seeks to bring others in line by attacking industry leaders like McDonald’s.
“Manufacturing in America would be made more difficult if contracting out were penalized. Contractor jobs could dwindle. These jobs are jeopardized by the NLRB’s unpredictable and outcome-biased “economic and industrial realities” test, which would make people reluctant to use these prevalent American business practices.”