How the NLRB's Employment Ruling Could Hurt Jobs, Business Growth

If you use temporary workers, contractors or operate a franchise, the cost of doing business -- and your liability -- has just risen.

On partisan lines, the National Labor Relations Board this week changed the way it defines a joint employer, essentially holding large franchises like McDonald's responsible for the employees that work for individual franchisees. That is probably the highest-profile impact, since the American labor movement has aggressively tried to unionize and increase pay for workers, targeting the fast-food franchisors rather than the small-business franchisees.

But the ruling itself had nothing to do with franchises per se, but rather temporary employees. The 3-2 NRLB decided waste company Browning-Ferris was a joint employer of workers hired by a staffing firm, Leadpoint Business Services, that was contracted to sort materials at a BFI recycling center.

That means that potentially any company that uses temporary help could find themselves having to treat those contractors as they would their own employees. That is likely to raise the price of hiring contractors, a business strategy designed to lower employment costs.

The decision was pushed by labor unions, who have been trying to stem decades-long membership erosion by targeting small businesses like fast-food restaurants. The decision is necessary, the unions have argued, because it ensures workers get higher wages and better benefits.

But the opposite could occur. Business groups, representing employers of all shapes and sizes, have warned that the economic reality of running a business demands that costs are kept in check with revenue. The attractiveness of using contractors is that you can actually hire more of them, since they impact a budget less than hiring a full-time employee. So, whereas a company may have brought in three contractors for a job, they may instead simply hire one full-timer. That means two people in that equation get no pay at all.

Imagine a company like Uber, which thrives on a contractor model, having suddenly to bring in all its drivers as full-time employees (which several states are pushing). Uber would have no choice but to cut the number of drivers it has to make sure its employment costs are aligned with its revenue. That means fewer drivers would get the benefit of that income and the opportunity to work for themselves, on their own terms, as contractors.

Unions and cheerleaders of the NLRB's decision will point to the profitability of a company like McDonald's or a large employer like Browning-Ferris as a way to handle any increased costs from the ruling. But small businesses have less financial flexibility.

The impact will certainly be felt on the startup level. Startups are financially constrained in the number of employees they can hire, so they outsource many functions, like development, HR, finance, etc., to contractors. Under the NLRB's ruling, budgets may have to be adjusted to bring on more full-time roles. That means less money available for product development, which could retard innovation.

Then there's the growth of existing companies through franchise. Franchises are the easiest path to the American dream, affording people with the desire to control their own financial destinies a turn-key way to open a store. But franchisors would not be wrong in deciding that it isn't worth the cost to bear the new employee responsibility. That could translate into fewer franchises being opened, meaning people in those communities would lose access to jobs. This will most be felt by fairly new smaller, franchisors, like health clubs and cleaning services, rather than the larger restaurant chains.

Then there's the impact on contractors and temp agencies themselves. These industries are full of small businesses that have taken advantage in the evolution of employment by filling some roles typically held by full-timers at organizations. They have employed workers, placed them in jobs, managed them well. In the true entrepreneurial spirit, they saw a problem for customers and solved it. Suddenly, their whole business model is at risk and are no longer an option to employ workers.

At issue, the philosophy of those backing the NLRB's ruling is just fundamentally wrong. It assumes that large employers are bad guys, gorging on profits by mistreating or undercompensating employees. Employers are the convenient villain in this narrative, where capitalism and free markets only benefit the chosen few, at the expense of the suffering masses.

But employers are the only ones who do the employing here. Unions can demand higher pay and better benefits all they want but someone has to actually create or maintain a job. Unions don't do that. The five members of the NLRB don't do that. Governments don't do that, at least not for the private sector, despite all the rhetoric from politicians about "job creation."

Only businesses create jobs. Large corporations, medium businesses, mom-and-pop franchises and tech startups. Smart government policies tend to focus on ways to encourage companies to add workers, through tax incentives and the like. The NLRB is actually discouraging companies from growing and hiring.

To penalize the only entities providing jobs in the name of increasing employment is both oxymoronic and garden-variety moronic. When companies decide they don't want to be joint employers and share the costs, the sole blame for that job loss will rest with the regulators at the NLRB, who put politics ahead of sound economics.