WHIPLASH! A Stunningly Fast Reversal Of Labor Policies

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It was predictable – even inevitable – that the Biden administration would reverse much of Trump’s labor oeuvre. But no one could have predicted how quickly! In a little more than a month, the administration has:

  • Installed Department of Labor leadership widely viewed as labor-friendly
  •  Abruptly replaced the NLRB’s Chief Counsel
  • Euthanized Trump’s joint employment regulation
  • Added a $15 minimum wage provision to the latest round of COVID funding

Reading the favorable tea leaves, Democrats have reintroduced the PRO Act. That piece of legislation, among other things, would outlaw state right to work laws and establish a national ABC employment standard.

Will this mad rush continue?! Or will the train slow down long enough to consider the implications of these actions? Can the franchise industry find a safe path through the maelstrom?

This question emerged in sharp detail a couple of years ago when the California legislature was considering passage of AB-5, the bill that established the ABC employment test as law in that state. Franchisors, franchisees, and the International Franchise Association lobbied, ultimately unsuccessfully, for a franchise exemption from the law. The logic of such an exception is obvious: Thousands of entrepreneurial franchisees are business owners, employing hundreds of thousands of Californians. As I noted in a previous blog (reference to Unintended Consequences blog), the ABC test risks classifying the franchisor as the employer of all those franchisees and all their employees. Under a broad interpretation of the ABC test, franchisees are no longer business owners; they are de facto manager employees of the franchisor. Much of the value franchisees worked hard to build in their independent businesses could suddenly disappear.

The perilous winds now blow nationally, and the franchise industry is already actively lobbying for a safe harbor. But what could a safe harbor look like? And is it achievable?

The simplest safe harbor is to exempt the franchise industry from application of the ABC and joint employment test. Unfortunately, such a simple and straightforward safe harbor exempts an impossibly wide swath of the economy and failed in California. But in the Venn diagram of legislation, could an acceptably narrow (from the point of view of labor advocates) and acceptably broad (from the point of view of franchisors and franchisees) be defined? Consider, for instance, a safe harbor defined as:

  • Franchisors that comply with the Federal Trade Commission franchise disclosure rule, and their franchisees (to narrow the scope of any safe harbor); and/or
  • Franchise relationships with franchisees having a minimum net worth and meet a liquidity standard (a well-heeled franchisee should be able to bear the expense); and/or
  • Franchise relationships in which the franchisor guarantees the franchisees’ payment of employment-related taxes to governmental agencies (to ensure ultimate payment); and/or
  • Franchise relationships in which the franchisor sets and enforces contractual requirements for the franchisee to comply with governmental pay and labor standards (to reduce the instances of non-compliance).

The public arguments in favor of the ABC test complain of low employee wages, the absence of protective mechanisms for workers, and violation of some federal labor standards. The suggestions above would seem to answer those complaints.

But politics is the art of the possible. The union agenda is broader, seeking the ability to organize vast numbers of workers more conveniently. It’s the union view that encourages a fundamental mischaracterization of the franchise industry as a segmented unitary “business” rather than a licensor providing franchisees an opportunity to build their own business using the licensor’s model. Union proponents will not be satisfied with anything less than the ability to organize the employees (and franchisees) of a large franchisor entity as if it were a unitary body.

Franchising should find allies in the more than 20 states that have enacted right to work laws. But overcoming PRO Act supporters to protect an industry that has allowed so many individuals, most of the small business owners, to build wealth will not be easy – indeed, it’s already proven to be difficult. But it’s worth the effort. Keep the lobbying pot at a boil!

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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