[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
RISKY BUSINESS: EFFECTS OF NEW JOINT EMPLOYER STANDARDS FOR SMALL FIRMS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
MARCH 17, 2016
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 114-050
Available via the GPO Website: www.fdsys.gov
____________
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
CHRIS GIBSON, New York
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
CARLOS CURBELO, Florida
MIKE BOST, Illinois
CRESENT HARDY, Nevada
NYDIA VELAZQUEZ, New York, Ranking Member
YVETTE CLARK, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRENDA LAWRENCE, Michigan
ALMA ADAMS, North Carolina
SETH MOULTON, Massachusetts
MARK TAKAI, Hawaii
Kevin Fitzpatrick, Staff Director
Emily Murphy, Deputy Staff Director for Policy
Jan Oliver, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Hon. Cresent Hardy............................................... 1
Hon. Alma Adams.................................................. 2
WITNESSES
Mr. Vinay Patel, President and CEO, Fairbrook Hotels, Chantilly,
VA, testifying on behalf of the Asian American Hotel Owners
Association.................................................... 4
Mr. Danny Farrar, CEO and Founder, SoldierFit, Frederick, MD,
testifying on behalf of the Coalition to Save Local Businesses. 5
Mr. Harris Freeman, Professor of Legal Research & Writing,
Western New England School of Law, Springfield, MA............. 7
Mr. Kurt Larkin, Partner, Hunton & Williams LLP, Richmond, VA.... 9
APPENDIX
Prepared Statements:
Mr. Vinay Patel, President and CEO, Fairbrook Hotels,
Chantilly, VA, testifying on behalf of the Asian American
Hotel Owners Association................................... 21
Mr. Danny Farrar, CEO and Founder, SoldierFit, Frederick, MD,
testifying on behalf of the Coalition to Save Local
Businesses................................................. 28
Mr. Harris Freeman, Professor of Legal Research & Writing,
Western New England School of Law, Springfield, MA......... 33
Mr. Kurt Larkin, Partner, Hunton & Williams LLP, Richmond, VA 40
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
ABC - Associated Builders and Contractors, Inc............... 62
AGC - Associated General Contractors of America.............. 63
AHLA - American Hotel and Lodging Association................ 65
IEC - Independent Electrical Contractors..................... 68
IFA - International Franchise Association.................... 70
IWLA - International Warehouse Logistics Association......... 78
National Restaurant Association.............................. 80
NATSO - National Association of Truckstop Operators.......... 83
NFIB - National Federation of Independent Business........... 89
RISKY BUSINESS: EFFECTS OF NEW JOINT EMPLOYER STANDARDS FOR SMALL FIRMS
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THURSDAY, MARCH 17, 2016
House of Representatives,
Committee on Small Business,
Subcommittee on Investigations, Oversight and
Regulations,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 2360, Rayburn House Office Building. Hon. Cresent Hardy
[chairman of the Subcommittee] presiding.
Present: Representatives Hardy, Chabot, Kelly, Velazquez,
and Adams.
Chairman HARDY. Good morning. Thank you for being here. I
call this meeting to order.
Owning your own business and being your own boss is part of
an American dream. Many Americans pursue that dream by using
proven business models, like subcontracting and franchising,
which results in the successful businesses that provide jobs
for millions of Americans. However, the National Labor
Relations Board and the Department of Labor are threatening
those business models by changing their joint employer
standards. Being deemed a joint employer has huge
ramifications. If two businesses are determined to be joint
employers, one could be held liable for the other's compliance
with the Federal labor laws.
Last year, the NLRB issued a decision that changed its 30-
year-old joint employer standard. Under the new standard, two
companies could be classified as a joint employer based on the
mere potential to control the terms of the conditions of
employment. In January, the Department of Labor issued joint
employer guidance. The DOL effectively abandons the existing
Fair Labor Standards Act regulations by declaring that it will
apply economic realities test to determine if there is a joint
employer relationship. These ambiguous standards are injecting
more uncertainty into a variety of business relationships.
Because of increased liability, larger companies may try to
reduce the risk by asserting more control over small businesses
that they contract with or ending business relationships.
Business models that have provided entrepreneurs with the
opportunity to live the American dream may no longer be viable.
I believe these misguided policy changes are a threat to small
businesses and need to be reconsidered before significant
damage is done to this vital sector in the American economy.
I appreciate all the witnesses being here today. I look
forward to your testimony, and I yield to Ranking Member Adams
for her opening remarks.
Ms. ADAMS. Thank you, Mr. Chair.
Prior to 1935, workers had few rights to freely engage in
activities to improve working conditions or pay. As a result,
less than 10 percent of the population was unionized. With
enactment of the National Relations Labor Act and creation of
the National Relations Labor Board that year, workers' rights
were greatly improved. Union membership tripled by the 1950s.
Today, however, participation has slipped to nearly pre-NLRA
levels, just 12 percent of the workforce. This drop in worker
organization has coincided with a desire by businesses to
distance themselves from the workforce through the use of
contractors and temporary staffing agencies. Currently, over
3.4 million workers are temporary status, while millions more
work for contractors. This business-to-business arrangement
primarily benefits the parent company. They can shift the
burden of dealing with payroll, benefits, and most importantly,
compliance with the NLRA, to the contractor. This sharp
increase in nontraditional employment has coincided with a
change in the joint employee standard in the early 1980s. At
that time, the Republican-led NLFB articulated a new, stricter
definition of what constitutes a joint employer where the
parent company had to have direct control over operations,
hours, or working conditions to be liable for violations of the
NLFA. After the ruling, the use of temps and contractors grew
and workers' rights suffered.
In an effort to better protect vulnerable workers, the NLRB
recently changed course on how to determine when multiple
companies are joint employers. The new test announced in
Browning-Ferris no longer requires that both employers actually
exercise the authority to control terms and conditions of
employment. Instead of both our employers within the meaning of
the common law and share in determining the essential terms and
conditions of employment, they will be deemed joint.
The reaction to the ruling has been mixed. Labor rights
experts have lauded the decision as a return to the original
intent of the law. They also contend the shared responsibility
under the recent decision should result in better oversight and
compliance with important labor laws. The impact on workers is
particularly important, and I am eager to hear from today's
witnesses on this issue. Critics, on the other hand, claim the
change will negatively impact the small-business community.
However, bringing the larger corporation to the bargaining
table could provide small businesses with support and resources
that they would otherwise not have in labor disputes before BFI
decision.
I look forward to hearing from our witnesses today
regarding this concern, and one thing that both sides seem to
agree on is that it will have an impact on unionizing. With the
NLRB indicating the previous standard was too restrictive,
allowing companies to skirt labor laws and collective
bargaining rights, unions are likely to be embroiled to bring
more joint employers to the bargaining table. I think we can
all agree that it is important for businesses to follow
applicable labor laws. I hope we can use today's hearing to
explore how the BFI case and subsequent developments at the
Department of Labor will impact both workers and businesses,
and I look forward to hearing from the witnesses. I thank you
for your participation today. I yield back, Mr. Chair.
Chairman HARDY. Thank you.
Okay. If Committee members have any opening statements
prepared, I ask that they be submitted for the record.
I would like to explain how things work around here. You
have a light in front of you. You will each have 5 minutes to
deliver your testimony. That light will turn green when you
start and with 1 minute remaining, the light will turn yellow.
Finally, at the end, it will turn red after the 5 minutes. I
would ask you to adhere to those rules the best you can.
Now, I would like to do some introductions for our
witnesses. First, we have Mr. Vinay Patel, president and CEO of
Fairbrook Hotels in Chantilly, Virginia. He has received
several hospitality industry awards, including the Presidential
Award by Carlson Companies for the Country Inn and Suites for
achieving the highest level of operation of excellence. Mr.
Patel holds a bachelor of science in marketing and business
administration from Virginia Commonwealth University, and is
testifying on behalf of the Asian American Hotel Owners
Association (AAHOA). Thank you, Mr. Patel for being here.
Up next we have Mr. Danny Farrar, CEO of SoldierFit, a
fitness company that he co-founded in 2013. Mr. Farrar is an
Army veteran who served in Iraq. SoldierFit, which is based in
Frederick, Maryland, is about to open its fourth location and
recently awarded two franchises. In addition, SoldierFit was
just named as the Eastern region's finalist for the U.S.
Chamber of Commerce Annual Dream Big Small Business of the Year
Award. He is testifying on behalf of the Coalition to Save
Local Businesses. Mr. Farrar, thank you for your service, and
thank you for being here. We appreciate everything you do here
today.
With that, I yield to Ranking Member Adams for her
introduction of the next witness.
Ms. ADAMS. Thank you, Mr. Chair.
Harris Freeman is a professor of legal research and writing
at Western New England University School of Law and a visiting
professor at the Labor Relations and Research Center at the
University of Massachusetts. He has taught labor and employment
law since 1999, and in 2009, Governor Patrick appointed
Professor Freeman to the Commonwealth Employment Relations
Board, the appellant agency body that oversees public sector
labor relations in Massachusetts. He served on that body until
2016. Professor Freeman's writings on labor and employment law
have appeared in numerous reviews and labor study journals,
including the Employee Rights and Employment Policy Journal,
and Working USA, a journal of labor and society. Mr. Freeman,
we welcome you today.
Chairman HARDY. Thank you. Our final witness is Mr. Kurt
Larkin, a partner in Hunton and Williams in Richmond, Virginia.
There he helps businesses of all sizes solve labor and
employment challenges. Mr. Larkin previously served in the
United States Army, Judge Advocate General Corps, and received
the Meritorious Service Medal, the Army Commendation Medal, and
the Global War on Terrorism Service Medal. He has received a
law degree from Temple University and his bachelor's degree
from Dickinson College. Mr. Larkin, thank you for your service,
and thank you for being here today.
With that, Mr. Patel, we will start with you, and we have 5
minutes. Thank you.
STATEMENTS OF VINAY PATEL, PRESIDENT AND CEO, FAIRBROOK HOTELS;
DANNY FARRAR, CEO AND FOUNDER, SOLDIERFIT; HARRIS FREEMAN,
PROFESSOR OF LEGAL RESEARCH AND WRITING, WESTERN NEW ENGLAND
SCHOOL OF LAW; KURT LARKIN, PARTNER, HUNTON AND WILLIAMS LLP
STATEMENT OF VINAY PATEL
Mr. PATEL. Chairman Hardy, Ranking Member Adams, members of
the Committee, I would like to thank you for the opportunity to
testify before you today and to share with you my experience as
a small-business owner. I look forward to a constructive
discussion about how the new joint employer standard will
negatively impact my business.
My name is Vinay Patel. I am a first-generation American
and proud small business owner from Herndon, Virginia. I am
appearing today not only as a hotelier but also as a volunteer
board member of the Asian American Hotel Owners Association.
AAHOA represents more than 15,000 small business owners who own
nearly 50 percent of all hotels in the United States.
My story is just like that of thousands of first and
second-generation American entrepreneurs. I was born in Malawi,
Africa, to parents of Indian origin. My family moved to the
United States in 1980 and bought a small, 27-room motel. We
lived at this motel and did everything, from cleaning rooms to
maintenance, and I would pop out of my living room to rent
rooms to guests that would come in. This is where I learned the
most important lessons in life of hard work, commitment to
family, and community service. After graduating from college,
we built a second property from the ground up, a 15-room Royal
Inn Motel, where my wife Tina and I ran the motel and did every
aspect of the business.
After running the motel for 2 years, I decided it was time
to take a risk and grow the company, so I began to look for
opportunities in franchise hotels. While my ambitions were
high, so too were the hurdles. Brand after brand turned me down
due to lack of experience in franchise properties. After
struggling to find a brand partner, Carlson Hotels took a
chance on me and I was able to open up the first Country Inn
Suites in Virginia in 1995, creating 15 new jobs. Today, I have
11 hotels between Maryland and Virginia and work with major
brands, including Carlson, Hilton, IHG, Wyndham, Choice Hotels,
and proud to employ over 150 associates.
I have explained my history in the hotel industry to show
you how difficult it is to succeed as a small-business man. For
this reason, the new joint employer standards are very
concerning. Having faced challenges of two unbranded properties
to start my career, franchising provided me the best business
model to expand my operations and create hundreds of jobs. As a
franchisee, I pay a license and royalty fee. In return, I
display a nationally recognized sign on our property and
benefit from a wide-reaching marketing campaign and a frontline
reservation system.
Most importantly, I own and operate my own small business.
I take all of the financial risk. I make all of the day-to-day
decisions at the hotels. The franchise business model is the
best vehicle for small business ownership in the lodging
industry. Changes in this model would discourage
entrepreneurship and create uncertainty between employers and
employees. The standard of the employer liability that existed
for more than 30 years was simple, clear, and concisely defined
and defined the relationship between employees and me.
Under the new standard, franchisors may be subject to
liability based on actions of franchisees. As a result, they
will likely choose to work with larger franchisees and forego
small business owners like myself. They would have no choice
but to exert control over the daily operations of my business.
I would cease to be an independent small business owner and
would be subject to the directives of a large corporation.
Ultimately, I would become a de facto employee of a corporate
brand.
Most threatening to my business is the Department of
Labor's characterization of employer labor. The Administrator's
interpretation directly takes aim at the hospitality industry.
It suggests that I jointly employ my staff with the franchisor,
simply because they are wearing shirts bearing the name of the
national brand.
As I mentioned before, the license agreement allows me to
use the logo for marketing. Ultimately, I employ my team. I
sign their paychecks, regardless of what logo is on their
shirt. In my experience, there is no circumstance in which the
national brands dictate the tasks of my employees.
Frankly, if these burdensome circumstances existed when I
entered the business, I would not have chosen the
entrepreneurship path. The new rule threatens my ability to own
and operate my business, to create and maintain good jobs, and
the stability of a franchise model.
Chairman Hardy, Ranking Member Adams, and the distinguished
members of the Committee, I thank you for the opportunity to
speak today. I urge this Committee to pass legislation that
would reestablish the traditional joint employer standard that
has allowed my family to realize the American dream of small
business ownership. Thank you.
Chairman HARDY. Thank you for your testimony.
Mr. Farrar?
STATEMENT OF DANNY FARRAR
Mr. FARRAR. Good morning, Chairman Hardy, Ranking Member
Adams, and distinguished members of the Subcommittee. My name
is Danny Farrar, and I am the CEO and co-founder of SoldierFit.
I am humbled by your invitation to speak on behalf of hundreds
of small business owners like myself, who are members of the
Coalition to Save Local Business.
Mr. Chairman, I am an 8-year military veteran who served in
the United States Army, including a combat tour in Iraq; a
former firefighter and EMT; and a certified personal trainer
with over a decade of experience. Today, I am a small business
owner and entrepreneur. We operate three gyms in Maryland and
will soon open our fourth. I am also a franchisor. We recently
awarded our first two franchises to further grow our concept.
So while some people hear the term franchise or franchisor and
think only of major corporations, they can also think of me, my
small business, and my story, and the story of hundreds of
thousands of both franchisors and franchisees who are small
business owners.
Together with my friend and one-time mentor, Dave Posin, I
co-founded SoldierFit, a fitness company committed to the
ideals of community, patriotism, and pursuit of the American
dream. I am also the president and co-founded of Platoon 22, a
nonprofit started to combat the depression and dislocation that
at least 22 veterans a day take their own lives. We are helping
brave service men and women who have charged into combat on
behalf of our Nation only to return scarred physically,
mentally, or both, just as I once was.
So as you can see, I have held many positions throughout my
life, and the threat of unlimited, unpredictable joint employer
liability is very scary. It threatens everything my partners
and colleagues have worked for in order to build our community.
While today I appear before you as a small business leader,
my road here was long and challenging. Mr. Chairman, I was
adopted at age 2. I graduated from high school 146 out of 147.
I left for boot camp after graduation, and on September 11,
2001, I took the first team for the Army into the Pentagon to
aid in search and rescue for survivors and remains. In the days
that followed, I took jobs here and there but I soon ended up
homeless. I once again turned to the military and deployed to
Iraq where I completed over 700 convoy missions. I have been
blown up and shot at at just about any place you can get blown
up and shot at. When I returned home I hit rock bottom. I
drank, I self-medicated, and ultimately decided that my life
was not worth living and attempted suicide. Somehow I got a
second chance.
Today I lead a company that has been the recipient of
several small business awards from the U.S. Chamber of Commerce
in the State of Maryland, as well as I was featured on the
cover of Men's Health magazine. I have gone from the kid who
barely graduated high school to giving the commencement address
at one. But Mr. Chairman, the National Relations Labor Board
threatens everything that I and millions of small-business
owners have built. When the NLRB decided to change the joint
employer liability standard in August of 2015, it was a scary
moment for local business owners like myself. For decades, the
joint employer standard had protected businesses like mine from
the liability of employees over which we have no actual or
direct control. That has always made sense. But now in adopting
this new, ambiguous, indirect, and even reserve control
standard, the NLRB has made employers potentially liable for
employees they do not employ. That is nonsense.
Mr. Chairman, from the perspective of small business, it
appears that Washington regulators are attempting to facilitate
a corporate takeover of Main Street. If regulators make large,
primary companies liable for the employment actions of third-
party vendors, suppliers, franchisers, or subcontractors over
which they have no direct control, large companies may be
compelled to exercise more control over these small businesses
to limit their new liability. Consequently, local business
owners may effectively be demoted from entrepreneur to middle
manager as they are gradually forced to forfeit operational
control of their stores, clubs, inns, or restaurants that they
built. Thus, the joint employer means big companies will get
bigger and small business may run out of business partners and
ultimately fade away.
On another note, Mr. Chairman, many local business owners
are nervous about the implications of joint employer on their
future access to capital. The members of this Subcommittee well
know that the Small Business Administration Loan Guaranty
Program is critical for creation of growth of small business,
as it was for SoldierFit. But as SBA considers changes to its
loan approval process, it is important for the agency to keep
in mind, however, anti-small business federal agencies are
changing the definition of joint employer and how they may
reduce that access to capital.
I urge the Subcommittee members to protect small
businesses' access to SBA loan guarantees. The bottom line on
the joint employer as a threat to small business, Mr. Chairman,
is this: no one can assure me that my business, or anyone
else's business, may not run afoul of a vague, joint employer
liability standard based on indirect or even unexercised
reserved control. That is why I and so many small business
owners around the country need help. We are asking Congress to
pass a simple, once in its legislation contained in H.R. 3459,
the Protecting Local Business Opportunity Act.
Mr. Chairman, this country allowed me to achieve the
American dream, and I found a small business committed to
enabling others to achieving their American dream. Please
protect small businesses like mine and give us certainty that
federal agencies in Washington are not going to needlessly
threaten our business.
Mr. Chairman, thank you for your leadership on this issue,
and I would be happy to answer any questions you have. God
bless.
Chairman HARDY. Thank you, Mr. Farrar.
Mr. Freeman?
STATEMENT OF HARRIS FREEMAN
Mr. FREEMAN. Good morning. I would like to thank chairman
of the Subcommittee, Congressman Cresent Hardy, Ranking Member
Congresswoman Alma Adams, and the other members of the
Subcommittee for this opportunity. I have two points to make
this morning.
First, the more inclusive joint employer doctrine adopted
by the NLRB and Browning-Ferris was an appropriate response to
the rapid expansion of subcontracting and precarious low-wage
work. Second, the BFI joint employer standard will do no harm
to America's small businesses even as it provides a potential
path to meaningful collective bargaining for a significant
sector of the low-wage workforce.
I begin my remarks by focusing on the industrial realities
of low-wage temping and franchising arrangements because it is
believed that BFI will have an impact on employment in these
arenas.
Temporary staffing and franchising account for a
disproportionate share of the economic growth since the Great
Recession of 2008. Close to 3 million employees working temp
positions and another 2.8 million working just the fast food
sector of franchising. And while profits are high in these
sectors, poverty-level wages, underemployment, extraordinarily
high rates of wage theft pervade the temporary staffing
industry in franchise fast food outlets and janitorial
services.
For example, temp workers comprise three-fourths of the
150,000 workers who load and unload goods at warehouses used by
Walmart and other big box stores in Chicago. As temps, they
experience a large wage penalty, earning $9 an hour, $3.48
lower than direct hires. Two-thirds live below the poverty
level. Households that include fast food franchise workers are
four times as likely to live below the poverty level. As a
result, taxpayers shell out $3.8 billion a year to subsidize
public benefits for these workers.
This type of systemic inequality and poverty also hurt
small business owners. Like their employees, many franchise
owners--not all, but many--are squeezed by big franchisors who
impose nonnegotiable terms of engagement on franchise owners
that tend to push down wages, promote costly churning of the
workforce, and significantly create high failure rates for
franchise owners.
The BFI decision should be understood in this context as a
proper exercise of the Board's statutory authority, and it is
in no way radical. The basic joint employment test has not
changed. It remains a case-specific, fact-intensive inquiry to
determine whether an employer shares or codetermines the terms
and conditions of employment.
What the NLRB did do is return to their traditional joint
employer test endorsed by the Supreme Court 50 years ago. This
closed a loophole created by board rulings in the 1980s. Now,
the inquiry is broader. The Board no longer is limited to
examining whether an employer controls employees directly and
immediately; instead, a traditional, multifactor common law
inquiry is used. The BFI case illustrates how this works. In a
representation case, the NLRB found that the recycling center
maintained legal control over 240 long-term temps by issuing
precise directives to hire, to fire, to control the line speed,
and other aspects of the work environment. These directives
were given directly by BFI and through the supervisors of the
temporary staffing agency onsite.
The terms of the temporary staffing agreement also
expressly ceded the right to control the workforce to the
recycling center. The Board concluded that the recycling center
was a joint employer because BFI affected the means and the
manner by which employment was directed there.
Nothing in this ruling presents a new or heightened level
of legal uncertainty for large or small employers that use
temps in staffing. The NLRB has made it clear that a potential
finding of joint employment arises when the structure of
staffing arrangements cedes to the user firm an extensive level
of direct or indirect control over the means and manner of
work.
It is also clear that BFI does not predetermine or rig the
outcome of joint employer inquiry and franchising. This was
made clear by the General Counsel a year ago in a detailed
advice memorandum that applied the BFI case to a franchise in
Nutritionality. The advice memo concluded that the franchise
agreement and directives did exercise control over brand and
product quality, but in no way did it exercise any control over
the terms and conditions of the employees at the franchise
outlets. The unfair labor practice case was dismissed without a
hearing.
A different result may, of course, arise when you have a
tightly controlled business format franchisee agreement, but
the Board has not yet addressed and finalized any kind of
inquiry into this type of scenario, but the Board has provided
significant guidance for franchisors. The General Counsel has
said that they should be exempt from a finding of joint
employment if they are only controlling work conditions to
support brand quality and the brand name. The statement of the
General Counsel has recognized that not all franchisors--in
fact, most franchisors--will not be joint employers.
In conclusion, it is my view that the Board's revival of
the traditional joint employer standard is an appropriate
exercise of the statutory authority granted to it by Congress,
particularly when considered in light of the NLRB's obligation
to apply labor law to changing economic realities. It is a
flexible test for employers and it is also positive and allows
fair treatment and decent wages for low-wage temp workers.
Thank you for considering my comments.
Chairman HARDY. Thank you, Mr. Freeman.
Mr. Larkin, I apologize. As you heard the alarms, we have
been called to votes on the floor, so we are going to recess
for probably--reconvene somewhere around 10 til the hour, so I
apologize for that. We are in recess.
[Recess]
Chairman HARDY. We will reconvene this meeting.
Mr. Larkin, thank you for waiting, and begin with your
testimony. You have 5 minutes.
STATEMENT OF KURT LARKIN
Mr. LARKIN. Thank you, Chairman Hardy, members of the
Subcommittee.
It is a privilege to be here with you today to talk about
an issue of critical importance to American small business: the
executive branch's ongoing efforts to expand the legal
standards for determining if one business is the joint employer
of individuals employed by another business.
For over 30 years, the NLRB adhered to a fairly
straightforward joint employer standard. The Board treated
separate companies as joint employers if they shared or
codetermined essential terms and conditions of employment. The
Board would look to whether the putative joint employer
exercised meaningful control over hiring, firing, discipline,
compensation, supervision, and direction, and whether its
control over such matters was direct and immediate. This
standard was easy for businesses to understand and, more
importantly, to plan for.
But that all changed this past summer. In August of 2015,
the Board departed from this precedent in a case called
Browning-Ferris Industries and announced a test of sweeping
scope that could redefine the employer-employee relationship
across all areas of business. Now, under this new test, the
Board may find a business to be a joint employer where it has
the mere potential to control the employment terms of another
business' employees, or where it exercises such control but
only indirectly. This leads to an obvious question: if a
putative joint employer never actually exercises direct control
over the employees of another company, how much retained or
indirect control is sufficient to establish joint employer
status?
Well, the murky guidance provided in the board's opinion
makes this question virtually impossible to answer. Now, some
have argued that the Browning-Ferris case dealt with a
temporary staffing firm and its client and that other business
models were unaffected by the Board's decision. But the
potential control and indirect control standards announced in
the case are broad enough to cover virtually any business
relationship, including general contractor and subcontractor,
outsourced service provider and user of outsourced service,
parent and subsidiary, and franchisor/franchisee.
The NLRB is not the only federal agency that has waded into
the joint employer conversation in recent months. This January,
the Department of Labor's Wage and Hour Administrator issued
formal guidance on the joint employer standards under the Fair
Labor Standards Act and the Migrant and Seasonal Agricultural
Worker Protection Act. The guidance goes into detail on the
concept of vertical joint employment, which the DOL defines for
the first time as when the employee of one company is
economically dependent on another company, which retained the
services of his or her employer.
The FLSA regulations do not address this concept. Instead,
it is addressed in the Migrant Act, a statute with a very
narrow and specific legislative purpose; to combat the abuse of
migrant farm labor workers in this country. The DOL's new
guidance cleverly imports that standard into the FLSA and
encourages investigators to pursue vertical joint employment
and wage and hour investigations. The DOL appears to have
worked on this guidance in secret. They certainly did not
solicit the input of the employer community.
Those in favor of these actions claim that expanded joint
employer liability is a good thing; that it will combat against
unscrupulous employers who take advantage of the growing
contingent workforce. That approach assumes, incorrectly in my
view, that the use of temporary employees is always somehow
inappropriate. Regardless, these legal standards make no
exception for the scrupulous employer, whatever that might
mean, and they sweep with a broad brush across all industries
and virtually all types of business relationships ensnaring
arrangements that are perfectly legal and vital to the growth
and success of small business in this country.
And as for the Freshii Board memorandum, Board advice
memoranda are nonbinding, have no effect on how the full Board
decides a later case, and they do not bind the Board's General
Counsel. And Freshii was issued prior to the Browning-Ferris
decision, making it all but obsolete. Ultimately, uncertainty
over how to deal with the Board's new standard, and perhaps the
standards of other executive agencies, poses a grave risk to
small business owners. Larger employers may conclude that they
are going to be held responsible for the liabilities of their
suppliers, subcontractors, or franchisees. They must exert more
control over their day-to-day operations so that they can be
more aware of and seek to mitigate these liabilities.
Franchisors would become responsible for matters like who to
hire, when to fire, how much to pay. Their administrative costs
would skyrocket.
On the other hand, small business owners would be relegated
to middle managers, no longer in control of their ultimate
business success. These negative effects could cause both sides
to reconsider their business relationships altogether. And you
do not need to take my word for it. You have already heard from
two small business owners this morning who fear those very
outcomes.
Members of the Subcommittee, on behalf of the employer
community, I respectfully submit to you that the Board's
previous joint employer standard worked well for over 30 years.
It provided management and labor alike with predictability in
terms of who was the employer of any given group of employees,
knowledge that is vital to stable bargaining and effective
labor relations. The new standard shatters that stability and
throws both sides into new and unprecedented territory.
Congress should intervene and return the Board's standard to
the well-understood rule that existed prior to Browning-Ferris.
Thank you very much for the privilege of testifying here
today.
Chairman HARDY. Thank you for your testimony. We will begin
our line of questioning. Again, thank you for being here. With
that, I will start.
I would like to address Mr. Larkin first. The critical
question when it comes to the NLRB is how much control makes
you a joint employer? When will business know the answers to
the question? In the meantime, what advice have you been giving
to your clients?
Mr. LARKIN. Well, the critical question, Mr. Chairman, the
answer to that, and part of the problem is that there is no
more bright line standard. So I do not know how to answer that
question. I have had considerable reflection on that and our
clients have had considerable worry about that. The board's new
test provides little to no guidance as to what level of
retained control, if it is not exercised, will be sufficient to
make you a joint employer so it is virtually impossible to
predict what level of control is insufficient under the test to
make you a joint employer.
Chairman HARDY. Thank you. Mr. Larkin, also, some folks,
including Professor Harris, have pointed to the advice memo
that the NLRB issued that stated Freshii is not liable as a
joint employer as an indicator that the standard is not as
broad as the community thinks and the franchise business should
not be concerned. Can you elaborate on why the Freshii memo is
not comforting to the franchise businesses?
Mr. LARKIN. Yes, sir. As I addressed in my remarks, Labor
Board advice memoranda are nonbinding. They do not bind the
full National Labor Relations Board, and even in the Freshii
case, the General Counsel was free to ignore it if he wanted
to, and the full Labor Board would not have had to rely on it.
So Board memoranda, advice memoranda do not set Board standard.
As I said, the memo was issued prior to the issuance of
Browning-Ferris, so the law on which it relies is now obsolete
and replaced by Browning-Ferris. So I do not think it provides
any comfort to those in the franchising business.
Chairman HARDY. Thank you.
Mr. Patel, you, in your testimony, indicated that if this
rule would have existed when you started, that you might have
looked at another business opportunity. Do you think the
business climate, other than the one you are doing right now,
do you think the business climate is discouraging people to
start businesses?
Mr. PATEL. If these same rules were applicable 20, 30 years
ago, I do not think I would be in business. I mean, forget
looking for a different business. I do not think there is an
opportunity to do business in terms of what is out there. If
you look at the story that the Asian American Hotel Owners
Association, many of the people that came over many years ago,
we talk about it amongst the community and say, I do not think
we could do what we did 20, 30 year ago today. The regulations
that we have, the taxes that are applied to us, I do not think
you could do what we did 20, 30 years ago in today's
environment.
Chairman HARDY. Thank you. So if franchisors today started
asserting their control and authority over your business today,
how would that affect your daily operations? And on the other
hand, franchisors take away some of that guidance that benefits
you. Could you currently provide some information on how that
affects you also?
Mr. PATEL. Running a business today is not easy. I mean,
dealing with customers, dealing with employees, dealing with a
lot of other issues that are out there, just running a day-to-
day business is not an easy task. Now you throw in the fact
that you have got other regulations, not only the governmental
regulations but if a franchisor comes in and says, hey, you
have got to do this, the employee has to do this, or whatever
regulations or whatever things they put upon us from a
franchisee perspective, that is one more thing that we have to
worry about. Like I said, today's business is not an easy
business to operate. That is one more thing that we have to
worry about and we would not want to.
Chairman HARDY. Thank you.
Now turning to Mr. Farrar. SoldierFit has just awarded two
franchises given the new joint employer standards, and our
decision today--are you having a difficult time with the
decision today or are you having a difficult time with how much
or how little guidance to provide your franchisee?
Mr. FARRAR. On our end, sir, it is scary. Like I said, the
law is very ambiguous. Where am I going to overstep that
bounds? At the same time, when that franchisee is coming to us,
what are they really purchasing? They are purchasing our
mistakes if you want to be honest about it because we are going
to help them navigate past the things that we made mistakes on
to get to where we are presently much, much faster. But if I am
sitting there worried about how much advice or how much
training and when and where our company can help with them,
then that does give us a moment of pause.
Chairman HARDY. Thank you.
With that being said, with all the challenges that you have
gone through, do you think with this decision today, would you
have started your operation or franchise the same way today?
Mr. FARRAR. We probably would not have. We have invested
already at least $300,000 into this. That is not chump change
for a small business by no stretch of the imagination. If we
are sitting down here and all of a sudden we are listed as a
joint employer, we get 7 percent on what they do. If we all of
a sudden have to up our back office so that we can actually
make sure that we have a real finger on the pulse of everything
that is happening day to day, that is going to cost us a lot of
money and the return investment is not there, so it would not
make sense.
Chairman HARDY. Thank you. Thank you for your testimony. My
time has expired.
I will yield to Ranking Member Adams.
Ms. ADAMS. Thank you, Mr. Chair.
Mr. Freeman, you mentioned that temporary workers
experience a wage penalty compared to their permanent
counterparts. Can you explain what a wage penalty is and why it
occurs?
Mr. FREEMAN. Certainly. The use of temporary staffing
agencies in large and small employers today is often set up to
charge the user employer a fee per hour for each temp worker
who is deployed to the user-employer's firm to do the basic
work of that firm. But the temp worker receives sometimes as
little as 60 percent of the fee that is paid to the staffing
agency. That is a huge profit that is made simply for the
process of deploying a person to do work somewhere else. That
is the wage penalty.
The significance of this today is that in wide swaths of
manufacturing, logistics, food processing, all or significant
parts of the workforce in many facilities. This goes for Nissan
plants in Mississippi. It goes for food processing plants in
New Bedford, Massachusetts, near where I live. They are temp
workers and they are there permanently. No one grows up and
wants to say, I want to work for a temp agency for the rest of
my life. That is what we are now experiencing. That is the wage
penalty. In those situations you have the classic potential for
joint employment because it is the user-employer who is setting
up the facility, deploying the managers, deploying the
supervisors, that is providing direction, both directly and
indirectly, for the work that is performed by these temp
workers. That is what the joint employer standard is set up to
address. So you can bring the people to the bargaining table
should workers choose to unionize and have everybody there who
is responsible for the work conditions. If they are not at the
bargaining table and you make a demand for an increase in the
wage, the temp agency can say, well, I cannot give it to you
because the wage limit is set by the user employer by contract.
That is exactly what happened in the BFI case.
Now, this is a totally different situation than what is
facing Mr. Farrar and Mr. Patel. I do not think from what they
said that they are joint employers in any way under the Board
standard, and I do not think that this changes the modus
operandi of their business at all.
Ms. ADAMS. Thank you. Is it not the case that common law
agency provides for both direct and indirect control over terms
and conditions of employment, and is that not what was decided
by the BFI case?
Mr. FREEMAN. Yes. The BFI case, as I said earlier, is
neither radical or new. It restates the standard that was
established in the Boire v. Greyhound case back in 1965 and is
merely a return to a standard that recognizes that the right to
control, and whether that right be exercised directly or
indirectly, is part of what constitutes the legal standard for
control under the common law agency test. There is nothing
exceeding that that is in the Board standard. Retaining that
right to control by contract is a critical aspect of what an
employer does when they draw up a contract with, for example, a
temporary staffing agency.
I see nothing unusual about this, and in situations where
you are not in a position to contract to have that kind of
control, you are not a joint employer. The problems that I
identified here, the problems of low wages in situations where
there might be joint employment, these problems were not
created by the joint employment doctrine. These problems are
created by larger economic forces that the Board is now
exercising its authority to try to set up a situation to give
workers the opportunity should they so choose to engage in
meaningful bargaining to affect terms and conditions that are
created by more than one business entity that they work for.
Ms. ADAMS. Okay. Let me ask you, Congress is now
considering H.R. 3459, Protecting Local Business Opportunity
Act. It has been reported out of the Education and Workforce
Committee on a party line vote. The bill would limit a joint
employer to only those who have actual direct and immediate
control. It is argued that this bill would protect the
independence of franchisees as independent business owners. But
is it not possible that the bill would actually have the
perverse effect of weakening the independence of franchisees?
Mr. FREEMAN. Well, certainly, because what that does, it
completely eliminates the possibility of a franchisor ever
being a joint employer and taking responsibility for terms and
conditions of employment that it is creating through the
franchising agreement it has with a franchisee. This is going
to free up the franchisor to increase the degree of control it
may have over franchisees. I do not think that is what
franchisees would want. I think this, as you say, may have a
rather perverse effect and may do exactly the opposite of what
some of the bill's sponsors intend. I do not think it is a good
idea. I think it is much better to have these things
adjudicated on a case-by-case, fact-specific basis.
Ms. ADAMS. Thank you, sir. I am out of time. Thank you.
Chairman HARDY. I will now turn the time over to Mr. Kelly
for questions for 5 minutes.
Mr. KELLY. I thank the witnesses for being here, and Mr.
Farrar and Mr. Larkin, thank you for your service to our
country. I generally joke with my JAG officers, though. I do
not know if I count that or not being a lawyer myself, Mr.
Larkin, but thank you for your service.
Mr. LARKIN. I have heard that before.
Mr. KELLY. Small businesses are so critical to this Nation,
and that is why I love being on this Committee. Mr. Farrar and
Mr. Patel, I pay attention to you because you have owned small
businesses, and unless you have owned a small business, you
cannot from the academia world understand what goes on in a
small business. But I would venture to say that in your first
couple of years in small business, can either of you comment to
whether or not you worked at below or at no minimum wage as an
owner of a franchise? Either a franchise or a franchisee, can
you comment on your earning as the actual owner of that
franchise or franchisee?
Mr. PATEL. During my first couple years, me and my wife
were on the property 24 hours. So if you divide up the hours
and the amount of salary we took in or the profits we took in
from the business, we were negative below minimum wage. So,
again, I think many small business owners face the same issue
in terms of, as far as minimum wage that we really earn,
especially with the fact that we put a lot of hours behind that
business, whether it be 24--whatever hours we put out there,
but it is definitely below what we have there.
Mr. FARRAR. I was homeless, so yes, sir. At the end of the
day, if you own a business, that is your passion. You do not
just say, hey, I am going to start this, and 5 o'clock it is
over. Owning a small business takes a toll, not only on
yourself but on your family as well. So I am working 24 hours a
day.
Mr. KELLY. They like to talk about the temporary workforce,
but can you guys, Mr. Patel and Mr. Farrar, I want a short
answer to this, but can you tell me what your most important
investment in your company being successful is?
Mr. PATEL. For us, it is human capital. People.
Mr. KELLY. People, right?
Mr. PATEL. I mean, again, a really quick, simply analogy on
this is today in the hotel business it is becoming a commodity.
You can go to a Holiday Inn, you can go to the Hampton Inn. A
room is a room. The breakfast is breakfast. The only way we
differentiate our properties to the competition is through our
people. We need the ability to manage our employees at our own
hotels. That is the only way we can get a competitive advantage
compared to the next hotel over.
Mr. KELLY. Mr. Farrar?
Mr. FARRAR. We have a saying in SoldierFit, whose company?
It is our company. It is everybody's company. I do not even
make the most in my company. The truth of the matter is if you
start a business, you are doing it for passion. You are going
to take care of the people that help your dream along.
Mr. KELLY. It goes back to my thing, those people, you make
sure that they are invested in your company. You are going to
pay them as well as you can. Sometimes there are sacrifices,
but it comes down to if they are not committed, temps do not
give you that same commitment, do they?
Mr. FARRAR. Negative.
Mr. KELLY. Okay. And as a franchisee, Mr. Patel, do you
prefer hiring temps or do you prefer hiring people who have an
investment in your company who want to see it grow and want to
grow with you?
Mr. PATEL. We hire our own people. We actually purchased a
hotel a couple years ago in Baltimore and the previous owner
had temp people there. After we took it over we just did our
own employees. It is just better to manage your own people.
Mr. FARRAR. On our end, sir, we have over 60 employees. We
have hired outside of our company nine times. Out of our
personal trainers, only two were outside the company. Ninety-
eight percent of our trainers started off as members in our
company, then got their certification, and then became
trainers.
Mr. KELLY. Finally, I think there was a comment and I do
not think that it would apply to you as a franchisee or
franchisor, but can you tell me if we do this on a case-by-case
basis, how much money you were going to pay to people like Mr.
Larkin over there to represent you, and does that make prices
go up for the consumer, and also make your wages lower because
you have less money to pay the employees that you currently
hire because you are defending lawsuits one by one?
Mr. PATEL. Most small businesses like us, we do not have
in-house attorneys. We do not have people to do that sort of
stuff for us. We are busy running our operations. So for us to
hire somebody outside would be a killer.
Mr. KELLY. NLRB, I am sure if you make the wrong decision
based on what you think is right and that you had good
intentions and you intended to do right, I am sure they do not
fine you if you had good intentions and you made a mistake that
was honest and truthful that they did not answer. They do not
fine you, do they? Absolutely, they fine.
Mr. Chairman, I yield back.
Chairman HARDY. The gentleman yields.
I now turn the time over to Ms. Velazquez, the ranking
member on the Small Business Committee.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
Mr. Freeman, we have heard that the BFI decision is going
to significantly impair the franchisor-franchisee business
model. What do you have to say about the argument that the BFI
joint employer test will impair this business model?
Mr. FREEMAN. Well, the core of my response to that would
present a different frame on what the NLRB has said about
franchising than is presented by Mr. Larkin. The NLRB has twice
made statements in the General Counsel's amicus brief and the
BFI case and in the advice memo in Nutritionality, that is very
clearly indicated that franchisors are there to protect their
brand and to protect the product quality. When they are
exercising direct control over aspects of a franchisee
enterprise to that end that the Board is not going to pursue
any kind of joint employer doctrine to hold the franchisor
responsible at all.
Now, it is true that these are advice memos, but the
General Counsel ultimately chooses to prosecute. In
Nutritionality, the case was dismissed and it never had to go
to the Board. Now, there may be some cases, certainly not the
kind of case that I hear from Mr. Patel and Mr. Farrar where
new levels of technology have created the ability of
franchisors to exercise tremendous amounts of control in a
franchise enterprise. The Board has a responsibility, when you
have new technology changes in the actual industrial landscape
of our Nation, to take a look at this and engage in a fact-
specific inquiry to see whether there might be a problem. That
is going on in the McDonald's case right now, and we will see
what happens. But that certainly seems to be a far cry from the
situation of many other franchisors. So I am not concerned
about overreach here. We have plenty of contractors and
subcontractors that have been unionized, that engage in all
kinds of business processes that have never been subject to
joint employment over the history of the Board's operation.
Ms. VELAZQUEZ. Thank you.
I think there is universal agreement that union organizing
is likely to increase following the BFI decision. How is that
going to impact small business contractors and franchisors?
Mr. FREEMAN. Well, we have many small business individuals
that are subcontractors and contractors who have unionized
workforces. In fact, if you look in the construction industry,
we have established a very vital middle class for construction
workers through the unionization of major sections of
commercial construction. I think it has been a benefit to our
Nation. It has been a benefit to the contractors who have
greater workforce stability and a much stronger workforce. I
think that kind of stability would be a positive thing in a
place like the fast food franchises where right now you have
workers who are attempting to make a living in a situation that
is netting them poverty-level wages and placing a burden upon
the taxpayer. So in those situations, we may see unionization.
I also think that we are facing situations in the
manufacturing food processing center where you have a lot of
temping, where we could radically improve the situation of the
workforce and make the business more stable, increase the
buying power of the workforce to increase business overall in
the United States, and I think that the BFI standard makes that
more possible than was the case under the old standard that the
Board reversed.
Ms. VELAZQUEZ. Thank you.
Mr. Farrar, I understand your concern about protecting your
brand in the franchise agreement. But if a franchisor
prescribes rules that could violate the NLRA at the franchisee
level, should the parent company be held accountable?
Mr. FARRAR. If I understand your question correctly, you
are asking me should we be able to impose these rules and
regulations? But again, it goes back to we do not know what the
rules and regulations are. It has not been spelled out clearly.
We do not know. So you could very easily come up with something
and say that we were the ones that we overstepped our bounds,
and that is what is scary about it. We do not know how best to
help the franchisee. Literally, that is why they purchased the
franchise, it is because they wanted some mentorship. We do not
know when it is going to be considered that we overstepped our
bounds and now we are directly doing anything with them. So it
is frightening.
Ms. VELAZQUEZ. Mr. Freeman, do you care to comment on his
assertion?
Mr. FREEMAN. I think that we now have some very clear
guidance, given the statement in the advice memo and given the
General Counsel's statements about franchising, that make it
clear what level of control would have to be exercised by a
franchisor before there would be even an investigation of joint
employment that could go to a hearing. We now have cases that
have been dismissed without hearing; that is without the kind
of expense of that extensive litigation. So I do not see this
as a real problem. I think that when you do have a situation of
extensive joint employer control, all employers in America
should be held liable to labor standards as they are to all
other legal standards.
I would finally say that as someone who has been involved
in adjudicating labor disputes for a long time, we have many
aspects of labor law that are situations that involve the
application of complex standards to any given fact situation.
Chairman HARDY. Wrap it up as quick as you can. Your time
is expired.
Ms. VELAZQUEZ. Thank you.
Mr. FREEMAN. This is nothing new.
Ms. VELAZQUEZ. I yield back. Thank you.
Chairman HARDY. I would like to thank you all for being
here. I really appreciate it.
Just one comment that I would like to make. I have spent 40
years in the construction industry, know it very well,
understand it very well, watched many studies over the years.
So with statements like that are made sometimes frustrate a guy
like me, because the studies are out there that showed that
these union operators, construction workers, have not
necessarily benefited the taxpayer. Yes, it has benefited their
pockets and the administrations of unions over the years. That
is why unions continued to decline. It is actually proven that
school projects in Ohio, they actually showed that they had 12
to 15 percent savings when it was gone out to competitive bid
versus union mandate-type projects. In Nevada, we have had
studies that show the $4.7 billion spent on schools, that we
could have probably done another 25 to 35 percent more schools
if it had not have gone under the prevailing wage workforce. So
is that a savings to the taxpayers?
With that, I would like to give everybody just 2 more
minutes to wrap up and make a comment. So I am going to start
with Mr. Larkin first, if you do not mind. It will come from
the other side. Anything that you missed that you might like to
bring forward.
Mr. LARKIN. Sure. A couple of things, specifically, on this
franchise question, and the guidance that has come down from
the General Counsel in the Freshii memo, the idea that merely
protecting your brand and your product quality will not make
you a joint employer. Well, who is going to make that decision?
The NLRB. And they have told us that they are going to make
that decision on a case-by-case basis using a standard that is
literally unintelligible. My clients ask me, how much control
do I have to exercise before I can be a joint employer? My
honest answer to them today is, I do not know. And I do not
like giving that advice. But that is the advice that I am
giving right now.
The problem with the standard is that its application is in
the eye of the beholder and the fact that there has only been
one decision, this Browning-Ferris decision and the next big
joint employer decision may not come for a while, that is not
the end of the inquiry. The real problem, as you have heard
today, is the potential chilling effect that this may have on
the franchise that never opens, on the employees who are never
hired, because someone, whether it is a franchisor, a
franchisee, a large general contractor who decides to insource
a specialty trade rather than outsource it, whatever the case
may be, it is that business owner who makes the decision not to
go into business with another business because they do not want
to be the next guinea pig before the Board. That is the problem
that I think this standard creates for all of us on the
employer side, and that is what we are grappling with.
Chairman HARDY. Thank you.
Mr. Freeman, 2 minutes.
Mr. FREEMAN. Thank you, Chairman Hardy.
I think today we have a situation in the United States
where we have seen tremendous prosperity that has been achieved
by franchisors and major corporations. We see small business
owners squeezed, and we also see it may be hard to run a small
business today. I certainly appreciate what these gentlemen are
saying to my left. But it is also hard to be a worker today in
this economy, especially working in low-wage sectors, and
franchising is among them. And in areas of manufacturing and
food processing and logistics where temping is widespread, it
is hard to be a worker. These workers are not able to make a
living wage. When you are working full-time and you are still
forced to go to the government to get benefits, we have a
social problem of inequality that needs an answer from many
different parts of our government and our business community.
One of those answers is giving workers a voice, giving them an
opportunity to exercise their bargaining power in the labor
market, to sit down across the table from those individuals who
are setting the terms and conditions of employment and engaging
in a conversation to explain what they need to make a living
and what they need to do their job correctly.
In that regard, I think that the success of unions in
raising the wages and living standards of their members, when
unions were large, extended well beyond the unionized workforce
and created a higher standard of living for all workers,
whether they were unionized or not. The shrinkage of union
representation, particularly in a low-wage economy, is hurting
all workers, and I think it is also hurting the opportunities
that small businesses have to grow and to maintain their
workforces.
So I have a somewhat different view of the importance of
the National Labor Relations Act and improving the situation
and the business climate and the living standards of workers in
America.
Chairman HARDY. Thank you for being here.
Mr. Farrar?
Mr. FARRAR. This whole morning we have talked about the
benefit to the employees, and the fact of the matter is small
business is the largest employer in the United States. When we
look at what has happened over the past several years,
franchising has outpaced organic startups continuously. If we
are going to move forward and make sure that we still have
stability in the economy, I want to move forward on something a
little bit stronger than I think. I want to know exactly what
is the ruling? What is the law? When do I become a joint
employer? And when I am not? I appreciate you all's time.
Chairman HARDY. Thank you for being here.
Mr. Patel?
Mr. PATEL. Thank you for inviting us today.
The biggest success factor in our business is people. We
talk about franchisor or franchisee and, you know, all the
benefits from franchisors. So when they say, well, they do
this, they do that, the franchisor can tell me what kind of
soap I can put in my room. It is a tangible item put in, you
know, a certain type of soap. It is tangible item to put in X-
kind of sheets. It is a tangible items to put in X-kind of
doughnuts or for a breakfast item. But when you start dealing
with people, it is difficult. You have different people in all
different places all over the world, and so dealing with people
is very difficult. When the franchisor comes in and has any
kind of impact on my ability to manage the people, that makes
it hard for us. I feel like my last point would be to say the
people is how we want to manage our hotel. That is what makes
us different, and so we just cannot have any kind of issues or
legislation that impacts my ability to manage my staff members
and my hotel.
Chairman HARDY. Thank you. I would like to thank all the
witnesses for being here today. I appreciate your attendance
and hearing your words of wisdom. Today's hearing has really
highlighted the confusion and I think the challenges that these
new joint employer standards are creating for a wide variety of
small businesses. We are going to continue our work here with
our colleagues and continue this Committee to educate the
workforce and address these problems.
I ask unanimous consent for the members to have 5 days to
submit their statements and the supporting materials for the
record.
Any objection?
Without objection, so ordered. This hearing is now
adjourned.
[Whereupon, at 11:35 a.m., the Subcommittee was adjourned.]
A P P E N D I X
Testimony of Vinay Patel
President and CEO of Fairbrook Hotels
Before the House Committee on Small Business
Subcommittee on Investigations, Oversight and Regulations
``Risky Business: Effects of New Joint Employer Standards for
Small Firms''
March 17, 2016
I. Introduction
Chairman Hardy, Ranking Member Adams, Congressman Knight
and Members of the Committee, I would like to thank you for the
opportunity to testify before you today and to share with you
my experiences as a small business owner, entrepreneur and job
creator. I look forward to a constructive discussion about how
the new joint employer standard created by the National Labor
Relations Board (NLRB) and the permeations of this new regime
across various government agencies will dramatically affect my
business, my employees and our ability to continue to provide
top service in the hospitality industry.
My name is Vinay Patel, I am first generation American and
proud small business owner from Herndon, Virginia. I am
appearing today not only as a hotelier, but also as volunteer
board member of the Asian American Hotel Owners Association
(AAHOA). AAHOA represents more than 15,000 small business
owners who own over 20,000 properties amounting to nearly 50%
of all hotels in the United States. Our members employ more
than 600,000 American workers and account for nearly $10
billion in payroll annually.
AAHOA is also a member of the Coalition to Save Local
Businesses (CSLB), which is a diverse group of locally owned,
independent small businesses, associations and organizations
dedicated to protecting all sectors of small business and
preserving the traditional joint employer legal standard at the
federal and state levels.
My story is like that of thousands of first and second
generation Americans and entrepreneurs from all across the
country. Over the last three decades, my family and I have
spent our careers developing a livelihood as hotel owners and
operators. Our company has enjoyed significant growth recently;
however, our success is the result of years of sacrifice, hard
work and relentless dedication to our family and to our
business.
I was born in Malawi, Africa, to parents who emigrated
there from India. Entrepreneurship has always been a calling
for my family. In Malawi, my father operated a small hardware
store before political unrest forced us to leave. In 1980, we
came to Greensboro, North Carolina, and lived with family
members who were in the hotel business. We learned what we
could from them and eventually set out to run our own property.
My family settled in Richmond, Virginia, and we not only owned
and operated the twenty-seven room Royal Inn Motel, but we also
lived at the property. Operating any hotel, even a small one,
is a twenty-four hour-a-day business. At that time, my parents,
brother and I comprised the entire staff. We served the front
desk, cleaned rooms, maintained the property, and accounted for
all of the marketing and financial planning. I learned the most
important lessons in my life, of hard work, commitment to
family and community service, during these formative years.
While most kids played sports, or learned music in high school,
my brother and I were responsible for running our motel during
nights and on weekends.
In 1992, I began college at Virginia Commonwealth
University, as a commuting student, so I could continue to help
with the family business while I was pursuing my degree. After
graduation, we built a second property from the ground up, a
fifteen room motel on the other side of Richmond, that we also
called the Royal Inn. By then, I was married, and my wife Tina
and I were now the sole operators of a new business. For two
years, we did nothing but run every aspect of the hotel, from
housekeeping, maintenance, guest services and ultimately
business planning.
With this tremendous firsthand experience in the lodging
business, I decided it was time to take an even greater risk in
an effort to grow the company and create a better life for my
family. I began to look for opportunities to expand our
operations from independent motels, to franchised properties
that came with the advantages of a national brand. While my
ambitions were high, so too were the hurdles. I found a parcel
of land in Stafford, Virginia, and laid plans to build a fifty-
five room hotel, with the idea of raising a franchise flag.
However, brand after brand turned me down. Most brands will
only accept franchisees who have demonstrated a successful and
profitable history in the business. My experiences at the Royal
Inn were not significant enough for brands to take a chance on
me. In some cases, brands would not even come out to the
property to see our plans, so we even created a video proposal
to show them how we intended to proceed.
After suffering many demoralizing defeats in my attempt to
open a franchised hotel, I was fortunate to find the right
partner. While I was seeking to open a new property, Country
Inn was seeking to expand on the East Coast. We ultimately came
to an agreement and I opened the first Country Inn in the
Commonwealth of Virginia in 1995. Here too, my wife, kids and I
lived on the property and attended to every aspect of the
business to save money and to ensure the best customer service.
My wife was the head of housekeeping, maintenance and
operations and I was the general manager. Two years later, we
sold the property and sought additional opportunities to expand
the business.
In 1999, we found a larger market and built a Country Inn
near Dulles International Airport, and the success of these
businesses has allowed us to grow considerably over the past
nearly two decades. Our experiences in learning every aspect of
the business, from the ground up, provided the discipline to
expand at a reasonable pace and to survive the recession, which
hit the hospitality industry particularly hard. Now, our
company, Fairbook Hotels, owns eleven hotels in Maryland and
Virginia, and we work with several franchise brands including
Carlson, Hilton, Wyndham and Choice hotels. We are also proud
to employ over 150 employees from the local communities.
The single most important aspect of our business is human
capital. Our associates are what make us great. We care about
our employees and are committed to helping them realize their
full potential, knowing that the needs of the company are best
met by meeting the needs of our people. We feel that the
dedication to our associates will bring us loyalty from our
guests, our financial stakeholders and the communities in which
we live and serve.
It is for this reason the new standard by which to
determine employer liability set by the National Labor
Relations Board and subsequently adopted by additional
administrative agencies is particularly disturbing. I have
explained my family's history in the hotel industry in great
detail in this testimony to illustrate how incredibly difficult
it is for an entrepreneur and an immigrant to succeed as a
small businessman. Therefore, I am alarmed by the reckless
actions of the NLRB to begin this destructive regime and now
the Department of Labor (DOL) to expand upon it. I have no
doubt that forging this path to regulate business relationships
will dismantle the franchise model, foreclose entrepreneurship
opportunities for small businesses and transform franchisees
into managers and employees from independent owners and
operators.
II. Franchising in the Lodging Industry
Having owned and operated two unbranded properties to start
my career, I thoughtfully considered the best opportunities to
grow my business. Unquestionably, franchising provided the best
business model to expand our operations and in doing so, we
have created hundreds of great jobs and invested in the local
communities our hotels serve.
Having read the directives by the NLRB and the DOL, I am
convinced that the bureaucrats who are creating these mandates
have never run a business and clearly do not understand the
franchise model. If they had, they would understand it is
inconceivable to conflate a franchisee with a franchisor, from
any perspective.
As a franchisee, I am responsible to pay a licensing fee
and royalties from the top line. In return, I receive the
benefits of displaying a nationally recognized sign at my
property, take advantage of a wide-reaching marketing campaign
and frontline reservations software to ensure efficiencies in
running my business and a user-friendly platform for our
customers to book rooms.
Most importantly however, I continue to own and operate my
own small business. I am responsible for taking all of the
financial and career risks involved with starting, maintaining
and growing the business. I am responsible to secure financing
for the endeavor and the capital to furnish the property.
Ultimately, it is my livelihood that is tied to the success or
failure of the enterprise, not that of some large corporation.
Moreover, when choosing how best to grow, I embrace
competition and will always seek the best deal for my business
interests. It is for this reason, I am not beholden to working
exclusively with one brand, or one franchisor. I will review
the market in which I have interest and study the type of
properties most likely to succeed. Subsequently, I will reach
out to the particular franchisor to apply for a license. Once
we have agreed, we will sign a franchise agreement that
outlines our mutual obligations.
As the hotelier, I am solely responsible for the daily
operations of the business. My interactions and my staff's
interactions with brand representatives are quite infrequent
and limited to ensuring the quality standards set for the
nationally recognized product remain consistent from one
property to the next. In no way does the brand direct the
responsibilities or functions of my employees. As their
employer, it is my responsibility to establish working
conditions including duties, wages, benefits, promotions,
discipline and accommodating for workers' needs and personal
situations.
I am also proud of my record not only as a successful
entrepreneur, but also as a successful job creator and
employer. With every hotel we buy or build, we create good
American jobs. Not only for those employees who come to work in
my hotels, but also in many secondary industries like
architecture, interior design and construction.
For those employees who come to work in our hotels, we
value building long term relationships and developing
successful hospitality professionals. In the lodging industry,
competition in ubiquitous. In order to set our properties apart
and to create return customers, we must provide exceptional
customer service. To accomplish this, we must have associates
and employees who are passionate about their work and enjoy
working for our company. We take great pride in compensating
our workers well and creating an environment in which our
employees have every opportunity to advance. There are many
examples at our properties where housekeepers have ascended to
lead their departments, or desk attendants have become general
managers. The lodging industry is unique in its position to
create advancement opportunities and provide a platform for
workers to develop and enhance their professional skills
through varied responsibilities.
The franchise business model is the most effective and
efficient vehicle for small business ownership within the
lodging industry and in countless other sectors across the
country. Changes in this model will undeniably discourage
entrepreneurship and create considerable uncertainty between
employers and employees across the industry.
III. The New Joint Employer Standard
Under the previous standard of employer liability that
existed for more than thirty years, an employer was determined
by the control he had over the working conditions of his
employees. This standard was simple, clear and certain.
Employers and employees came to depend on this understanding to
concisely define our relationship.
Under the new standards sought and created by the NLRB,
franchisors may be subject to liability based on the actions or
inactions of franchisees. As a business owner, I am extremely
confident in my ability to run by business; however, as I have
experienced throughout my career, franchisors are particularly
risk averse and will not simply accept additional liability.
Instead, they will likely choose only to work with few, large
franchisees and foreclose new opportunities for small business
owners like me, in an effort to mitigate liability from a
lesser established business partner. They will also have no
choice but to exert control over the daily operations of my
businesses under our existing contracts. In doing so, I would
cease to be an independent small business owner and I would be
subject to the directives of a faceless corporation--
ultimately, I would become a de facto employee of the corporate
brand.
Worse and most threatening to my business however, is the
recent absurd characterization of employer liability from the
Department of Labor. In the Wage and Hour Division (WHD)
Administrator's Interpretation (AI) No. 2016-1, the DOL
discounts the importance of employer status being defined by
the direct control over working conditions and instead seeks to
create a regime based on an ambiguous standard of ``economic
realities,'' that is fabricated on twisted logic and a mangled
understanding of reality.
In the AI, the WHD Administrator directly and unabashedly
takes aim at the hospitality industry in general and the hotel
business specifically. In the first footnote, the AI putatively
determines the existence of joint employer status within the
hotel businesses simply because employees may wear shirts
bearing the name of a national brand. As I explained earlier,
the license agreement I sign with a brand permits me to use a
brand name as a marketing tool to attract customers to a
nationally recognized product or program. Ultimately, I employ
my employees and I am the one who signs the front of their
paycheck, regardless of what logo is embroidered on an
employee's shirt. In my experience, there is no circumstance in
which the national brand dictates the tasks performed by my
employees--yet the WHD Administrator is keen to grossly
oversimplify the nature of my business.
It is critical to understand that, in our company, we have
a very positive and collaborative working environment. This
means we compensate our employees well and can accommodate for
their specific needs. Because of this personal connection, I am
in a position to understand an employee's individual
circumstances and provide flexibility in compensation,
scheduling, responsibilities and opportunities for advancement.
I fear this flexibility will disappear if franchisors were
forced to take control over the daily operations and staffing
decisions became subject to a rigid standardized formula from
the corporate headquarters.
The WHD Administrator and AI further denigrate tens of
thousands of hardworking small business owners by dismissing
all of the efforts necessary to create a business and develop a
workforce in designating us as mere ``intermediaries'' between
employees and another corporate entity. This characterization
implies hoteliers are already essentially employees of the
corporate brand. I assure you, the struggles my family have
endured and challenges we have overcome are those of
entrepreneurs, business owners and employers--titles we wear
with pride.
I also understand that the witch hunt for joint employers
does not end at the NLRB, or Department of Labor, but rather
there may be a concerted effort by other federal administrative
agencies, like the Occupational Safety and Health
Administration (OSHA) to develop liability for franchisors
based on health and safety inspections of franchisees. The
collusion between agencies to impute legal obligations onto
franchisors will only drive a wedge into our industry and
create difficulty for me to operate my business.
Frankly, if these burdensome circumstances existed when I
entered the business, I likely would have chosen another avenue
for entrepreneurship. The intrusion by bureaucrats in
Washington, DC, threatens my ability to own and operate my
business, to create and maintain good jobs and the stability of
the franchise business model across the United States.
For more than thirty years, my family and I have built a
successful business as entrepreneurs, and over the course of a
few short months, government officials at the NLRB, DOL and
OSHA have created a regulatory mechanism to destroy our way of
life.
IV. Conclusion
Chairman Hardy, Ranking Member Adams and distinguished
members of the Committee, I thank you for the opportunity to
speak with you today and for your highlighting this escalating
attack on entrepreneurs and small business owners.
The NLRB's new joint employer standard and subsequent cases
before the Board have and will undoubtedly affect how
independent business owners and operators interact with our
employees and business partners. I fear the new standard will
create conditions of liability unsustainable for franchisors
and they will ultimately take control over the employment
decisions and daily operations of franchised businesses.
In an apparent effort to expedite this process, the DOL and
other agencies have created a new standard of joint employment
based on manufactured jargon, artificial business models and
guidelines that lack any semblance of consistency or certainty.
These actions undermine the ability for entrepreneurs like me
to grow our businesses, create sustainable, local jobs and
invest in our communities.
I urge this committee to investigate the motivations behind
this coordinated assault on small business and to pass
legislation that will reestablish the traditional joint
employer standard that has allowed my family and me to realize
the American Dream of small business ownership.
Thank you.
Good morning Chairman Hardy, Ranking Member Adams, and
distinguished members of the Subcommittee. My name is Danny
Farrar, and I am the CEO and Founder of SOLDIERFIT. It is an
honor to be in Washington today before you, and I am humbled by
your invitation to speak on behalf of the hundreds of small
business owners like myself who are members of the Coalition to
Save Local Businesses. The CSLB is a diverse group of locally
owned, independent businesses, associations and organizations
that is devoted to protecting small businesses by restoring the
``joint employer'' legal standard based on ``direct control''
in federal labor law. I also am a member of the International
Franchise Association, the world's oldest and largest
organization representing franchising worldwide. I appreciate
the opportunity to tell you my story and explain how the issue
before us today will impact small businesses like mine.
When the National Labor Relations Board (NLRB) decided to
change the joint employer liability standard in August 2015, it
was a scary moment for local business owners like me. For
decades, the joint employer standard has protected businesses
like mine from liability for employees over which they do not
have actual or direct control. That has always made sense. But
now, in adopting this new ambiguous indirect control standard,
the NLRB has made employers potentially liable for employees
they do not employ. This new standard jeopardizes countless
business partnerships in numerous industries. Any legal
doctrine that is based on ``indirect'' and even unexercised,
``reserved'' control, such as this one, is so unclear and
unpredictable that no one can assure small businesses that
their operations are not in violation. That's why I, and so
many small business owners around the country, are so
concerned. We are being forced to try to grow and operate under
such great uncertainty because of this new standard.
So Mr. Chairman, I'm not asking for much today. I'm simply
asking this Subcommittee and the Congress to protect local
businesses. Specifically, I'm asking to reinstate the very
successful joint employer legal standard that the NLRB chose to
change in its August 2015 decision in Browning-Ferris
Industries. The simple, one-sentence legislation contained in
H.R. 3459, the Protecting Local Business Opportunity Act, is
the solution that can protect small businesses like mine and
give us certainty that federal agencies are not going to
threaten our businesses in the future. I urge every member to
support the bill.
MY SMALL BUSINESS STORY
Mr. Chairman, I am a small business owner and an
entrepreneur. By working extremely hard and expending
immeasurable time and energy, I founded a successful company
that has three locations and we are opening a fourth very soon.
But Mr. Chairman, I also am a franchisor; we recently awarded
our first two franchises to further grow our concept. And the
threat of unlimited, unpredictable joint employer liability is
very scary. It threatens everything my partners and colleagues
have worked to build in our community.
So while some people may hear the term ``franchise'' or
``franchisor'' and think only of major corporations, they can
also think of me, my small business, and my story, and the
story of hundreds of thousands of both franchisors and
franchisees who are small business owners.
Together with my friend and mentor, Dave Posin, I co-
founded SOLDIERFIT, a fitness company committed to the ideals
of community, patriotism, and the pursuit of the American
Dream. In just over 5 years, our company has grown to 3
corporate locations in Maryland, soon to be 4, and we have
recently awarded our first 2 franchise locations. I also am the
founder and president of Platoon22, a non-profit I started to
combat the depression and dislocation that leads 22 veterans a
day to take their own lives. I am an eight-year military
veteran who served in the U.S. Army, including a combat tour in
Iraq, a former firefighter and EMT, and a certified personal
trainer with over a decade of experience. As you can see, I've
held many positions throughout my life. While today I appear
before you as a successful business leader, my road here was
long and challenging.
My story begins when I was 2 years old and my great aunt
and uncle adopted me. I was different from my adopted family. I
had a different personality, and so from a very young age, I
was deemed lazy and worthless. The negative experiences of my
early childhood would set a tone that plagued me for many years
afterwards.
By the time I graduated from high school, where I graduated
146th out of 147 kids, I had very few options for my future. At
a time when so many of my peers were beginning their adult
lives full of hope for the future, I began a different journey,
one that would be plagued with misery, contempt and trauma.
I left for boot camp after graduation and, shortly
thereafter, my adoptive mother died of breast cancer. Six
months after that, my brother took his own life.
On September 11, 2001, I took the first Army Team into the
Pentagon to begin the process of searching for remains. With
every step I took, my anger grew. I wanted to be deployed to
avenge that day, but my unit was not eligible. I ended up
leaving the service.
I took jobs here and there, with one at a fitness club
where I met my SOLDIERFIT co-founder, Dave Posin. I ended up
getting fired while Dave got promoted to General Manager. With
no job, no income, and horrible credit, I ended up homeless.
Dave helped me find couches to sleep on so I could survive, so
to speak.
With no clear goals for my future, I once again turned to
the military. One month later, I was in Iraq, where I completed
more than 700 convoy missions. I've been blown up and shot at
just about anywhere you can get blown up and shot at in Iraq.
Prior to heading overseas, I was full of cracks. Coming home, I
was officially a broken man.
The only job I could get upon my return was going door-to-
door selling windows. My ``colleagues'' were all in high
school. Imagine that, returning from Iraq where I led troops in
combat to a job high school kids did to earn extra spending
money.
I wanted desperately to get out of the pit I was in, but I
was scared to try anything for fear of failure, not realizing
that every tie I refused to try, my failure was assured. The
life I dreamed of seemed so far beyond my grasp. I had no
title, no purpose. I wasn't a manager; I wasn't a graduate; I
didn't come from money; and I had no family. How on earth could
someone like me dig myself out of this hole that had become my
life?
I ultimately hit rock bottom. I drank, self-medicated, and
ultimately decided my life was not worth living. Somehow I got
a second chance. I woke up the morning after I tried to end my
life in the psyche ward, and for three days, I was surrounded
by people who convinced me that the only way out was to repair
my cracks and begin climbing out of the wreckage. With the help
of mental health professionals and mentors, I began again.
Today, I lead a company that has been the recipient of the
small business of the year awards in Germantown, Frederick, and
the State of Maryland. I have been awarded the ``Top 40 under
40'' of the very important professionals shaping the future of
Maryland. I was a top 5 finalist for Men's Health ``Ultimate
Guy'' contest. I have gone from the kid who barely graduated
from high school to giving the commencement address at one. I
have gone from the young adult who was homeless to owning a
business that is slated to make over $3.2 million this year.
Through my non-profit, Platoon 22, I am helping brave
service men and women who have charged into combat on behalf of
our nation, only to return irreparably scarred--physically,
mentally, or both.
The SOLDIERFIT team also is active in the International
Franchise Association's VetFran program, which provides career
opportunities to veterans and their families to ensure an
easier transition back into the civilian economy. Together with
a network of over 650 franchise brands, VetFran voluntarily
offers financial discounts, mentorship, and training for
aspiring veteran franchisees and veterans seeking employment.
Under this program, over 238,000 veterans and military spouses
have found employment opportunities, including 6,500 veterans
who have become franchise business owners since 2011. I am
humbled to be part of this network and, more importantly, in a
personal position to help the tens of thousands of service men
and women returning from overseas deployments, some of whom are
as lost as I once was.
SMALL BUSINESS IMPACT
Mr. Chairman, from the perspective of a small business, it
appears regulators are attempting a corporate takeover of Main
Street by changing the definition of a joint employer. If
Washington regulators make large, primary companies liable for
the employment and labor actions of third-party vendors,
suppliers, franchisees or subcontractors over which they have
no direct control, large companies may be compelled to exercise
more control over these small businesses to limit their NLRA
liability. Consequently, local business owners may effectively
be demoted from entrepreneur to middle manager, as they are
gradually forced to forfeit operational control of the stores,
clubs, inns or restaurants they built. Not to mention, the
enterprise value of thousands of franchises and small
businesses may decrease because of the decreased operational
control. Further, large companies may be forced to bring
services in house rather than hiring a small business to do the
work. Joint employer means big companies will get bigger, and
small businesses may run out of business partners and
ultimately fade away.
A leading firm that conducts research on franchise
businesses, FRANdata, released in November 2015 a survey report
entitled ``FRANdata Key Findings and Survey Results: 2015
National Labor Relations Board Joint-Employer Ruling.''
FRANdata surveyed industry leaders and stakeholders, conducted
secondary research, and examined franchise company filings to
assess the potential negative impact of the NLRB ruling on
franchise businesses and indirectly on the economy.
Among the most significant findings of the report are:
An estimated 40,000 franchise businesses,
affecting more than 75,000 locations, are at risk of
failure because of the joint-employer ruling, which
will increase labor and operating costs beyond
operating margins.
As a result of business failures,
downsizing, and a decline in the rate of new franchise
business formation, more than 600,000 jobs may be lost
or not created.
The equity value of franchise businesses is
expected to drop by a third to a half. Rising costs
will have a negative multiplier effect on valuations.
Potentially, hundreds of thousands of franchise
business owners will see the equity they have built in
their businesses over years decline as the advantages
of the franchise model are stripped away, causing
higher operating costs.\1\
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\1\ Crews, A. et al. FRANdata Key Findings and Survey Results: 2015
National Labor Relations Board Joint-Employer Ruling (2015). FRANdata.
As frightening as those statistics are, the NLRB is not the
only agency trying to expand joint employer liability over more
small businesses. On January 20, the Wage and Hour Division
(WHD) released a 16-page administrative interpretation (AI) on
joint employment, and it seems to provide an even broader
interpretation of joint employment under the Fair Labor
Standards Act than even the NLRB's definition in its Browning-
---------------------------------------------------------------------------
Ferris decision.
In addition to the joint employer concerns, many local
business owners are nervous about their future access to
capital and the implications of joint employer on other
agencies. The members of this Subcommittee well know that the
Small Business Administration's loan guarantee program is
critical to the creation and growth of small businesses, as it
was to SOLDIERFIT. Our business award came from the SBA, and
our first franchisee secured his initial loan from SBA as well.
So I want to emphasize how important it is that the SBA
implement changes to the loan approval process that streamline
and facilitate franchise businesses' access to these loans.
But, any changes to the standards cannot be viewed in a vacuum.
It is important to consider these changes in light of other
federal government agencies revisions to the definition of a
joint employer and the increased scrutiny on franchise
businesses to ensure there are no unintended consequences that
would reduce access to capital.
The worst case would be if the SBA streamlining proposal
were to be hijacked by the anti-franchise-model forces in other
agencies. If the SBA regulation meant to accelerate small
businesses access to capital becomes instead a hammer wielded
by zealots in other agencies determined to crush the franchise
model, they would view the destruction as inconvenient but
necessary collateral damage, but it would be a disaster for
small business owners.
Why are our local, small businesses being unfairly targeted
by numerous federal agencies? Why don't we have a government
that supports small business, rather than making it
immeasurably more difficult to create jobs and serve our
communities? I don't see or experience the so-called ``cracks''
in our model that some officials here in Washington claim to be
trying to repair. From where I sit, small business like mine
still employ 50-60 percent of the workforce and demonstrate
immeasurable support for every community in America. We are
proving that small business will continue to chart the course
for success in this country. Mr. Chairman, one of the most
important lessons I can share from my life experiences is this:
When we refuse to fight, our failure is assured. I've seen what
can happen when we refuse to stand up and fight for ourselves.
That's why I'm here today. To fight for my dream and the dreams
of thousands of small business owners throughout the United
States who are truly confused about why our government is
implementing regulations that will assuredly chip away at our
American Dream. Our Coalition is looking for members of
Congress to stand up with us.
CLOSING
Mr. Chairman, I hope that through my story and the
testimony of my fellow witnesses, you will gain a deeper
understanding of the very long roads many of us have walked
before realizing the dreams we are living today, and the
reasons why our coalition of Main Street small businesses is
asking Congress for help.
The bottom line, Mr. Chairman, is this--no one can assure
me that my business--or anyone else's business--may not run
afoul of the NLRB's vague joint employer liability standard
based on ``indirect'' and even unexercised, ``reserved''
control. That's why I and so many small business owners around
the country are asking for Congress to fight for locally owned
businesses like mine, and exercise its Article I power to
provide a check on an overreach by a federal agency like the
NLRB's joint employer activism.
Mr. Chairman, thank you for your leadership on this issue,
and thank you again for allowing me the honor of addressing you
today. I would be happy to answer any questions you have. God
bless.
HOUSE COMMITTEE ON SMALL BUSINESS
SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT, AND REGULATIONS
Hearing: Risky Business: Effects of New Joint Employer
Standards for Small Firms
Testimony of Professor Harris Freeman
Western New England University School of Law
March 17, 2016
I would like to thank the Chairman of the subcommittee,
Congressman Cresent Hardy, ranking member, Congressman Alma
Adams, and the other members of the subcommittee for this
opportunity. My testimony will address two points regarding the
National Labor Relations Board's (NLRB) joint-employer rule
announced in Browning-Ferris Industries of California \1\
(BFI). First, the BFI decision is a proper exercise of the
Board's statutory authority and its consistent with Supreme
Court precedent. Second, the Board's return to a more inclusive
joint-employer standard will do no harm to America's small
businesses even as it provides a path to meaningful collective
bargaining for a significant sector of the low-wage work force
that has been excluded from the protections of federal labor
law.
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\1\ 362 NLRB No. 186 (2015).
The viewpoint I offer today rests on my profound respect
for the labor rights and procedures embodied in the National
Labor Relations Act, which I acquired over the course of
fifteen years teaching labor law and researching the workplace
rights of contingent workers. My view of the Board's
modification of its own legal standard is also informed by my
experience adjudicating labor law disputes during the six-plus
years I served on the Commonwealth Employment Relations Board
in Massachusetts. In this capacity, my decision making process
was often guided by well-regarded NLRB precedent, policy, and
the Board's sound methods of adapting labor law standards to
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the evolving realities of the modern workplace.
The NLRB's Joint Employer Standard in Context
The NLRB's reexamination of the joint employer doctrine in
BFI was an appropriate response to the rapid expansion of
subcontracting and precarious low-wage work. Over the course of
the 21st century, this trend has irreversibly fissured and
restructured the American workplace. The extensive
subcontracting of core business functions now has deep roots in
low-wage sectors of our economy due to the widespread use of
temporary staffing services and the expansion of franchising
relationships.
I begin my remarks focusing on the `industrial realities'
of temping and franchising arrangements. It is widely
recognized that these ubiquitous forms of business organization
are impacted by the NLRB's BFI ruling. Temping and franchising
accounted for a disproportionate share of the economic growth
following the Great Recession of 2008. By 2013, staffing
services generated $109 billion in sales and 2.8 million temp
positions--a full 2.0 percent of total jobs. Profits are also
high; consider that in the first quarter of 2014, True Blue
(formerly Labor Ready), the largest U.S. staffing agency,
reported profits of $120 million on gross revenues of $453
million. Franchising is equally profitable. The ten largest
fast-food franchises employed over 2.25 million workers and
earned more than $7.4 billion in 2012. Shareholders earned
another $7.7 billion in buybacks and dividends. This trend
should be of particular concern to members of the Congressional
Small Business Committee because soaring profits and
substantial job growth in franchising and temporary staffing
services have advanced hand in glove with poverty-level wages,
extraordinarily high rates of wage theft and widespread health
and safety violations in these sectors.
Widely reported problems associated with low-wage temp work
have eroded the wages, benefits and conditions of work in
logistics, manufacturing, recycling and food processing.\2\
Compared to direct hires, temp workers experience a wage
penalty. This is most severe among blue-collar temps who now
comprise 42 percent of the temporary staffing workforce. For
example, in metro Chicago, a class of permanent, long-term temp
workers load and unload goods at the warehouses that service
WalMart and other big box stores. These perma-temps comprise
over two-thirds of the 150,000 strong warehouse workforce.
Their pay averages $9 per hour--$3.48 less than direct hires.
Almost two-thirds of these workers fall below the federal
poverty line. A well-documented, national epidemic of wage
theft by unscrupulous staffing agencies only makes matters
worse. Further, OSHA complaints and protests by temp workers
have unearthed major health and safety issues, causing OSHA to
establish a Temporary Worker Initiative to determine, in part,
when to hold staffing agencies and client employers jointly
liable for violations that impact the temporary workforce.
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\2\ See, e.g., Michael Grabell, Temp Land: Working in the New
Economy, PRO PUBLICA, https://www.propublica.org/series/temp-land (last
visited March 15, 2016)
The workplace ills associated with franchising is
exemplified by the challenges facing the 3.8 million workers
who are employed in the fast-food sector. More than 75 percent
of them work in franchised outlets and routinely face under-
employment, poverty-inducing earnings and wage theft.
Households that include a fast-food worker are four times as
likely to live below the federal poverty level. The social
costs of these conditions are borne by U.S. taxpayers, who
shell out about $3.8 billion per year to subsidize public
benefits received by fast-food workers employed at the top-ten
fast-food franchises who must supplement poverty-level wages
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with assistance from government welfare programs.
Workers are not the only ones impacted by the systemic
production of inequality and poverty that is associated with
many franchising arrangements. Individual franchise owners also
face high levels of economic uncertainty and like franchise
workers, they are being squeezed by the big franchisors. The
non-negotiable terms of franchise agreements dictate extensive
franchisor control over day-to-day operations while placing
most of business risk on the franchisee. These agreements
routinely require franchisees to pay exorbitant fees for the
right to operate, which not only places a downward pressure on
wages, but leads to higher failure rates for franchised small
business owners.\3\
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\3\ See Gillian K. Hadfield, Problematic Relations: Franchising and
the Law of Incomplete Contracts, 42 STAN. L. REV. 927, 933-34 (1990);
Catherine Rucklehaus, et al., Who's the Boss: Restoring Accountability
in Outsourced Work (NELP May 2014).
The BFI Decision is a Return to the Traditional Joint
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Employer Test Endorsed by the Supreme Court
The BFI decision did not radically reinterpret Board
precedent and it did not resurrect a dormant, outmoded legal
test. The Board merely returned to the traditional joint
employment standard endorsed by the U.S. Supreme Court more
than fifty years ago.\4\ BFI maintains the basic inquiry long
used to determine whether a putative joint employer ``possesses
sufficient control over the work of the employees to qualify as
a `joint employer' with [the actual employer].''\5\ Under the
BFI decision the Board reaffirmed that a finding joint-
employment is made only when a case-specific factual analysis
shows that two employers ``share or co-determine'' the
essential terms and conditions of employment.
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\4\ Boire v. Greyhound Corp., 376 U.S. 473 (1964).
\5\ Id. at 481.
What the NLRB did do in BFI is close a longstanding
loophole in the joint employer test. Relying on the joint
employer test endorsed by the Supreme Court in Boire v.
Greyhound Corporation \6\ and the influential reasoning of the
Third Circuit Court of Appeals' decision, NLRB v. Browning-
Ferris Industries of Pennsylvania,\7\ the Board found that
joint employment rests on a broader approach to the concept of
control than is found in later Board rulings beginning in
1984.\8\ Under this broader framework, the Board can once again
examine the full range of common law agency factors that can
reveal whether and how an employer actually exercises legal
control over the essential terms and conditions of employment.
The Board no longer limits its inquiry to examining whether
employer controls are exercised ``directly and immediately.''
Instead, it will now use the traditional, multifactor common
law inquiry to determine whether an employer ``affects the
means or manner of employees' work and terms of employment,
either directly or through an intermediary.'' \9\
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\6\ Boire, 376 U.S. 473.
\7\ 691 F.2 1117 (3rd Cir. 1982).
\8\ Browning-Ferris Industries, 362 NLRB No. 186, slip op. at *16-
18.
\9\ Id., slip op. at *21.
This Board implemented this approach in the BFI case and
found that the user employer maintained legal control over the
240 long-term temps at its recycling facility through a host of
direct and intermediated factors, all of which decisively
affected the means and manner of the employees' work and terms
of employment. The user employer was found to have issued
``precise directives'' through staffing agency supervisors to
communicate when a worker should be dismissed, where workers
should be deployed, and the pace at which the work should be
completed.\10\
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\10\ Id.
The staffing agreement between BFI and the Leadpoint
staffing agency was also found to establish BFI's control over
the workforce. The agreement gave BFI final say over who the
staffing firm could hire to work at BFI's facility, how much
the staffing agency could pay the workforce, and the right of
BFI to override Leadpoint supervisors' directives to the
workforce.\11\ The Board majority's robust, fact-based inquiry
into the employment relationship at BFI's facility contrasts
sharply with the limited factual assessment of the employment
relationship urged by the two dissenting Board members.\12\
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\11\ Browning-Ferris Industries, 362 NLRB No. 186, slip op. at *24
\12\ Id., slip op. at *25 (Dissent of Members Miscimarra and
Johnson).
The BFI decision does not specifically address or apply the
joint employer test to franchising arrangements. That factual
determination is currently underway as part of an unfair labor
practices complaint alleging that McDonalds Corporation, one of
the nation's largest franchisors, is a joint employer along
with a number of its franchise outlets.\13\ I am not in a
position to second-guess the outcome of this fact-intensive
inquiry.
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\13\ McDonald's USA, LLC, a Joint Employer, et al., 02-CA-093893,
et al.; 363 NLRB No. 92 (New York, NY, January 8, 2016) (consolidating
13 complaints and 78 charges against McDonald's USA, LLC).
However, this much is clear: Over the course of the last
decade, tightly controlled business format franchisee
arrangements have expanded significantly to ensure that major
franchisors can maintain uniformity of brand, product and
operations essential to their business models. These business
format agreements permit franchisor control over franchisee
workers' terms and conditions of employment. Franchisor control
can be exercised through training, operating manuals, and
regular communications with franchisees.\14\ Franchisors in the
fast-food industry have also implemented sophisticated
computer-driven management systems to ensure brand maintenance
and protection, creating yet another mechanism for franchisor
control over worker' terms and conditions of employment.
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\14\ See Gillian K. Hadfield, Problematic Relations: Franchising
and the Law of Incomplete Contracts, 42 STAN. L. REV. 927, 933-34
(1990).
These systems and the terms of franchise agreements, often
enforced through unannounced, on-site visits by franchisor
representatives, allow franchisors to control the number of
workers required to do the job, the manner and speed of the
performance of every work task, the equipment and supplies used
on the job, the manner in which equipment is used, as well as
employee grooming and uniform standards. Every one of these
control mechanisms dictated by the franchisor may affect the
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essential terms and conditions of employment.
The NLRB's BFI Decision Presents a Workable Joint
Employment Test That Does Not Create Uncertainty for Small
Business
In the context of the economic realities of twenty-first
century subcontracting that I have outlined, the BFI joint
employer standard does not present an unworkable test and it
should not be a source of legal uncertainty or anxiety for the
small business community. The BFI ruling and other advice
provided by the NLRB provide ample, clear guidance for small
business owners, their human resource officers and legal
counsel. In fact, as recently as April of last year, the NLRB's
Office of the General Counsel issued a detailed ten-page advice
memorandum that applied the BFI joint employer test in case
involving a major fast-food franchisor in Chicago.\15\
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\15\ Advice Memorandum from Barry J. Kearney, Assoc. Gen Counsel,
Div. of Advice, Office of the Gen. Counsel NLRB to Peter Sung Ohr, Reg.
Dir., Region 13 (April 28, 2015), https://www.nlrb.gov/cases-decisions/
advice-memos.
The General Counsel's advice memorandum explained that the
franchisor, Nutritionality, Inc., did exercise extensive
control over its franchisee's operations to ensure standardized
products and customer experience. However, the General Counsel
found that the controls Nutritionality exercised through its
franchise agreement and directives it issued related to the
image that the franchisor wished to convey and did not extend
to any control over the terms and conditions of the employees
at the franchisee's restaurant.\16\ The memorandum concluded
that the franchisor, Nutritionality, Inc. was not a joint-
employer and therefore not liable for unfair labor practices
allegedly committed by its affiliate. The NLRB's advice
memorandum makes it clear that the Board's joint employment
test does not predetermine the outcome of any fact-intensive,
case-by-case inquiry into joint employment.
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\16\ Id.
It should also be noted that the BFI joint employer
standard has not in any way altered the status of small
business owners that operate a sizeable portion of franchises.
These franchisee owners have the same employer status under the
BFI joint employer standard as they did under the Board's
previous test. What has changed is that the burden of
responsibility for the terms and conditions of franchise
employees can be equally shouldered by franchisors when they
are deemed joint employers. A finding joint employer status in
a franchising arrangement might actually prove beneficial to
franchisee owners. Joint employment would bring the franchisor
to the bargaining table along with the franchisee. This would
place the soaring profits being made at the top of the
franchise chain on the table as a source of wage hikes for the
underpaid franchise workforce. This could very well provide
relief for beleaguered franchise owners whose small business is
forced to operate with costly levels of workforce turnover \17\
and under razor thin margins imposed by the franchisor business
model.
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\17\ High turnover rates hurt low-wage companies in general,
costing employers $4,700 each time a worker leaves and is replaced in
the high-turnover sector. Robert Pollin & Jeannette Wicks-Lim, A
Fifteen Dollar Minimum Wage: How Fast Food Industry Could Adjust
Without Shedding Jobs, Political Economy Research Institute Working
Paper, No. 373 (Jan. 2015), http://www.peri.umass.edu/fileadmin/pdf/
working--papers/working--papers--351-
400/WP373.pdf.
With regard to temping: the BFI decision does not present
any uncertainty for large or small employers that use a
temporary staffing agency workforce to perform the essential
work of their business. In these situations, the NLRB has made
it clear that that a user employer who contracts with a
temporary staffing agency is potentially a joint employer of
the temp workers that are deployed to the user firm's place of
work. The potential for a finding of joint employment is built
into the structure of temporary staffing arrangements and
contractual agreements. Unlike franchising, the temporary
staffing industry business model is based on codetermination of
the terms and conditions of employment. Typically, the user
firm contracts with the staffing agency and retains extensive
direct and indirect control over the means and manner by which
the work is carried out in its own facility. The temporary
staffing agency earns a substantial profit for handling all
payroll issues, providing worker's compensation insurance and
coordinating the hiring of the workforce. BFI makes it clear
that even when the temporary staffing agency deploys
supervisors to the user employer's worksite along with the temp
workers, the staffing agency supervisors are obliged to follow
the directives issued by the user firm's managerial and
supervisory staff.\18\
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\18\ Browning-Ferris Industries, 362 NLRB No. 186, slip op. at *22-
24; See also Harris Freeman & George Gonos, Taming the Employment
Sharks: the Case for Regulating Profit-Driven Labor Market
Intermediaries in High Velocity Labor Markets, 13 Empl. Rts. & Employ.
Pol'y J. 285 (2009).
Over the last few years, we have witnessed large numbers of
under-employed, low-wage temporary workers and franchised fast-
food workers demand their fundamental labor rights. The NLRB's
joint employment test now allows for these workers to enter
into meaningful collective bargaining relationships in
workplaces where temporary staffing arrangements and
franchising result in two employers sharing or codetermining
the conditions of work. It would be virtually impossible for
the temporary workforce at BFI to meaningfully bargain over a
wage increase or to discuss a safety issue when BFI is not at
the bargaining table to address these mandatory subjects of
bargaining. Similarly, there can be no meaningful collective
bargaining when a franchisor exercises palpable, albeit
indirect control, over workplace conditions that are at the
core of the obligation to engage in good faith bargaining if
that employer is not legally obligated to sit at the bargaining
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table with workers that choose to unionize.
Conclusion
Given the NLRB's obligation to apply labor law to changing
economic realities,\19\ the Board acted well within the
authority granted to it by Congress when it revised its joint
employer standard in BFI. Nothing in the statutory text of the
NLRA or in well-reasoned precedent prevents the Board from
returning to the traditional joint employer test that
predominated until 1980, when a rigid and narrower conception
of joint-employment gained sway in Board proceedings. It is my
view that the Board's revival of the traditional, joint-
employer standard is necessary to achieve both the flexibility
employers seek and the fair treatment and decent wages that
temps and franchise workers demand and deserve. Absent the
NLRB's revised joint employment test, our nation runs the risk
of labor law becoming irrelevant in the much of the low-wage
economy, where collective bargaining is sorely needed to
address the extreme levels of inequality and exploitation
currently experienced by millions of American workers.
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\19\ See NLRB v. Weingarten, 420 U.S. 251, 266 (1975).
Thank you for considering my comments.
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