House Hearing Demonstrates New DOL Regulations Will Hurt Businesses and Workers

On Wednesday, June 10th, major regulatory changes expected from the U.S. Department of Labor (DOL) this summer were the subject of a House Subcommittee on Workforce Protections hearing. The forthcoming changes include the potential doubling of the salary threshold for overtime exemption and a new test for the primary duties of overtime-exempt workers. These modifications should concern franchise businesses, as they could severely limit opportunities for lower-level employees to advance in rank, limit the flexibility of business owners to manage their workers as they see fit, and increase compliance and payroll costs.

Subcommittee Chairman Tim Walberg (R-MI) shared his hope that despite an “administration notorious for overreach”, the Department of Labor should listen to employers’ concerns, and put forward a “proposal that encourages rather than stifles productivity, personal opportunity, and economic growth.”

The Subcommittee heard testimony from industry experts and academics regarding the current and proposed regulatory framework. While the witnesses disagreed in some aspects, they all agreed that the current enforcement structure of the Fair Labor Standards Act (FLSA) of 1938 needs to change. Three of the key witnesses were: Seth Harris, former Acting Secretary of Labor, Jamie Richardson, a Vice President of White Castle, Inc., a well-known quick service restaurant chain and Leonard Court, a labor lawyer and member of the U.S. Chamber of Commerce Labor Relations Committee.

The majority of Mr. Harris’ testimony addressed why the DOL should prioritize combating income inequality by raising the Federal minimum wage and increasing the salary threshold. To back up his claims, he relied on his theory that workers will see pay increases because employers will be forced to reclassify previously overtime-exempt workers as hourly workers, and these workers will then get more 1.5x pay for overtime for the work they previously did on salary.

Mr. Harris’ theories were countered by Mr. Richardson of White Castle, Inc., whom represented the views of many private-sector companies. Mr. Richardson explained that these new regulatory changes will add significant compliance costs, drive down worker opportunities and disrupt business in a negative manner. For example, of the over 400 White Castle restaurants, 445 of the 450 managers started as a cashier or a line cook, and worked their way up. If the primary duties test for a salary employee is narrowed based on strict percentages of time spent on managing, there will no longer be as many opportunities for lower-level employees to get managerial experience necessary for this advancement process. This is because a strict definition of primary duties will no longer afford many managers the flexibility to lead from the front and help out with non-managerial duties as needed. Employers will be forced to choose between classifying a worker as strictly management, and strictly hourly, which will in turn, reduce the amount of managers it can hire. It will also reduce opportunities for workers who depend on the ability to work outside the office to promote flexibility, because they will now fall under strictly hourly regulations, and out-of-office work is hard to measure on an hourly basis.

Contrary to Mr. Harris’ suggestion that these overtime changes would result in additional hours for many workers, Mr. Richardson and another human resources professional on the panel testified that- a reduction of salaried positions will also lead to reduced hours, reduced pay, and a feeling of demotion by these formerly salaried employees.  In addition, Mr. Richardson noted an Oxford University study on the effects of an increased salary exemption, which found that an increase to a salary exemption limit of $808 per week, would affect 1.7 million restaurant workers, and would cost business owners $5.2 billion per year. These increased costs will have a negative impact on raises, health benefits, and generous leave policies.

Leonard Court, a member of the U.S. Chamber of Commerce’s Labor Relations Committee, testified about how unfair DOL enforcement techniques create a negative environment for businesses. He cited numerous examples about how Wage and Hours Division investigators have been using a variety of “questionable” tactics to pressure business owners and human resources professionals into unfair and possibly unjustified settlements. Mr. Court also expressed concerns that the DOL needs to release more administrative interpretations of existing law, in order to give businesses more guidance on how to effectively comply with a complex web of regulations.

Among other issues, the three most concerning tactics employed by the DOL were: deliberately pressuring businesses not to use legal counsel, compelling immediate settlements by threatening litigation, and using bait and switch techniques to grab double punitive damages for new cases by using settled ones as admissions of guilt. These tactics result in an enforcement environment that, in the words of Mr. Court, has shifted from an approach of “cooperation and education to one of confrontation and coerced settlement.” Mr. Court cited one case that demonstrates this attitude, where despite months of investigation and six figures of legal fees, the WHD found no wrongdoing by the employer. The tactics and methods of the DOL are even more concerning in light of the Obama Administration’s authorization of expansive funding for franchise-specific Wage and Hour Division investigators.

The final version of these regulations is expected to be released soon, and it appears the potential changes are already creating uncertainty for businesses. As witnesses like Mr. Court and Ms. Berberich, a member of the Society of Human Resource Management observed, more helpful changes the DOL could make include adding clarity to the laws through opinion letters, and by promoting flexibility for the new generation of tech-savvy workers. Written transcripts of witness testimony can be found here, and the video of the full hearing is available here.

Franchisor Executive Addresses House Panel on Franchise Operations

Today, a panel of industry, labor and legal representatives gathered in the Rayburn House Office Building to testify before the Subcommittee on Health, Employment, Labor and Pensions of the House Committee on Education and the Workforce.  The hearing entitled, “What Should Workers and Employers Expect Next from the National Labor Relations Board?” concerned the NLRB’s propositions that may affect the business climate for businesses of all sizes, including many franchise businesses.  Of particular interest during the hearing was the issue of joint-employer status, which if applied to franchising would have drastic consequences.  As Subcommittee Chairman Phil Roe (R-TN) noted in his opening remarks, “A standard has been in place for 30 years to determine when two employers share immediate and direct control over essential terms and conditions of employment … This isn’t a new concept, so the board’s recent solicitation [for clarification on the definition of joint-employers] is highly suspect and strongly suggests it’s eager to abandon existing policies in favor of a new standard more favorable to union interests.”

While the Chairman’s concern was shared by many members of the Committee, it was the testimony from Andrew Puzder, CEO of CKE Restaurants (Carl’s Jr. and Hardee’s) and IFA Board Member that drove home the message regarding the harmful effects of joint-employers status on franchising.  During his testimony, Mr. Puzder articulated that the relationship between franchisors and franchisees is one of mutual benefit, but separate operation.  Ranking Member John Tierney (D-MA) posed a series of questions to clarify the relationship, “Do Franchisees generally hire people? … Same with firing? … Same with disciplining?” To all of these, Mr. Puzder delivered an affirmative yes, signaling that the franchisees truly do manage their own businesses at every turn.  To assert that franchisors completely mandate how franchisees run their businesses an insult to the thousands of entrepreneurs who have utilized the resources that the franchising model provides them to go into business for themselves.

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Mr. Puzder went on to note that labeling franchisors as joint employers would drastically alter the employment landscape.  While CKE and its franchisees are responsible for over 70,000 jobs in the United States, joint-employer status would require massive oversight on CKE’s behalf, meaning less autonomy for franchisees and increased costs for the franchisor to monitor the employment process and administrative overhead.  Not only would this convolute the hiring process and discourage expanding employment, but it would also take away the equity franchisees created in their own business.

Joint employer status is an important issue for those in the franchise community, which is why the International Franchise Association will continue to uphold the mutually beneficial business model of franchising.  Rather than cater to special interests and politically-motivated unions, the NLRB should protect hard-working business owners and the thousands that they employ.

Please click here to view today’s hearing.

IFA Members come together for IFA’s Second Annual California Franchising Day at the Sacramento Capitol

On March 4, IFA brought together over 25 member franchisors and franchisees for our second annual Franchising Day at the California State Capitol in Sacramento. Among the brands represented were, California Closets, CKE Restaurants, The Entrepreneur Authority, Franchise Services Inc., FranNet, Glass Doctor, Home Instead Senior Care, Interim HealthCare, IHOP, McDonald’s, Mr. Rooter, Plumbing Md, ARCO ampm, Instant Imprints, The UPS Store, Marriott, Yum! Brands, Schlotzsky’s and more.

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The wide array of brands and industries represented at the event helped drive the message to policymakers that franchising has a significant economic impact in California, which continues to thrive in the current regulatory climate due to the partnership that exists between franchisees and franchisors.

Mark Justice, EVP & COO, MR. Stax, Inc., an IHOP franchisee based in Valencia, echoed the importance of being engaged in IFA’s advocacy efforts. “An eye-opening experience! Not only did we influence and educate our state’s lawmakers about the franchise business model, we walked away with a better understanding of the political process in California.”

Attendees heard from several Committee Chairs and leadership from both parties in the morning as well as Nancy McFadden, a top advisor to Governor Jerry Brown, before breaking into smaller groups for more than 40 meetings with individual legislators throughout the afternoon. The meetings were a resounding success.

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Chris Mesker of The Entrepreneur Authority in Sacramento explained, “It was clear to me that our legislators were interested in learning how franchising is really geared for the small business owner vs. large corporation. Getting the opportunity to educate them on the business model and economic impact was a huge step in having them understand how vital we are to the fabric of California. The impact we made was very apparent. It was a great day and I can’t wait to be involved moving forward.”

During the meetings, attendees shared stories about their businesses and the importance of  franchise businesses in California and the nearly one million jobs they create. In a proactive approach, IFA and its members made the most of their time with legislators, advocating on behalf of this proven business model.

“Without the face-to-face legislative interaction with the IFA and its members, many legislators and their staff would have no exposure to franchising and a limited understanding of this small business employment engine,” said Don Conger, of Financial Services, Inc., the franchisor of Sir Speedy and TeamLogicIT, among other brands based in Mission Viejo.

Driving this message home was Don Higginson of The UPS Store in San Diego. “The jury is out on franchising. This business model has been around nearly 50 years now and has flourished under the current regulatory system.”

In conjunction with the event, an op-ed by IFA President & CEO Steve Caldeira and Mr. Rooter of Sonoma County franchisee Saunda Kitchen appeared in Fox & Hounds, entitled “Franchise Business is a Team Sport”. The op-ed provides a unique look into how franchising allows entrepreneurs to go into business for themselves, but not by themselves with the support of a franchise system.

Moving forward, IFA will continue its outreach and engagement in California inviting legislators to in-district meetings and roundtables this spring and summer.

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NLRB Allows Deadline to Pass, Will Not Challenge Employee Rights Poster Ruling

Last May, the U.S. Court of Appeals for the D.C. Circuit ruled that the National Labor Relations Board (NLRB) had overstepped its authority and infringed upon employers’ free speech rights when it issued a regulation requiring employers to put up a poster in workplaces with an unbalanced and biased overview of employee rights under the National Labor Relations Act. The employer community prevailed in this suit, brought by the National Association of Manufacturers and the Coalition for a Democratic Workplace (CDW). It also prevailed in a suit brought by the U.S. Chamber of Commerce, in which the U.S. Court of Appeals for the Fourth Circuit denied the Board’s petition to reconsider its decision that the NLRB lacked the authority to require the poster.

Last Friday, the deadline for the NLRB to petition the U.S. Supreme Court to review the DC Circuit’s decision passed, effectively ending the debate on the issue that sparked outrage from the employer community.

“The IFA is pleased that the NLRB has declined to challenge the appeals court’s decision to invalidate the employee rights poster requirement,” IFA President & CEO Steve Caldeira said in a statement. “The NLRB was wise not to appeal a decision that swiftly and unambiguously rejected the Board’s aggressive overstepping of its authority in requiring an unbalanced workers’ rights notice that deprives employers of their free speech rights and misguides the workers it was designed to inform.”

Although the employer community is still at odds with the NLRB over other significant regulations and decisions, it appears that the threat of the employee rights poster has been neutralized. IFA remains committed in its advocacy for workforce policies that benefit both workers and employers, and stands prepared to protect the franchise business model from such ill-conceived and damaging labor regulations as those promulgated by the NLRB.

 

 

The Stories Behind The Numbers

 

 

The International Franchise Association (IFA) and the U.S. Chamber of Commerce’s new study brings hard data to the stories we’ve heard from franchisees throughout the country – Obamacare is raising costs, reducing jobs and slowing growth. Stephen Bienko, who owns 15 College Hunks Hauling Junk franchises, is but one example of the stories behind these numbers. He appeared on Bloomberg Surveillance this morning to detail the impact of the ACA on his business.

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Stephen Bienko Asserts That Part-Time Workers Who Want To Increase Their Hours And Go Full-Time Would Be Better Able To Do So Without Obamacare. “If it was not for the Affordable Care Act, yes, we would be making them full-time, 40 plus hours per week [and paying their healthcare benefits]. One of the biggest issues with the Affordable Care Act is the change of the 40 hour work week to 30 hours. Changing that status not only affects the financial reality, but it also affects the culture within a company.” (Stephen Bienko, “How Obamacare Impacts College Hunks Moving Junk,” Bloomberg TV, 11/13/2013)

Due To The Law, Bienko Is Having To Reduce Hours To Plan Ahead For The Employer Mandate. “I have already begun to reduce my employees’ hours, and that’s the way you have to do it as a small business owner, you have to plan ahead…The delay does nothing for us. We have to plan ahead…”(Stephen Bienko, “How Obamacare Impacts College Hunks Moving Junk,” Bloomberg TV, 11/13/2013)

As the IFA-U.S. Chamber study shows, Bienko is not the only one feeling the effects of the employer mandate. Below are more stories behind the numbers (see our fact sheet HERE for more, as well as highlights from the U.S. Chamber of Commerce HERE).

Fact #1: Twenty-nine percent of business decision-makers in franchise businesses report increasing costs due to the law.

Brooke and Les Wilson Of Two Men And A Truck Estimate Obamacare Will Result In $100,000 To $120,000 In Higher Costs. “Les said they already provide health and dental insurance for employees, but they’re expecting more of their employees to elect for coverage because of the individual insurance mandate. They’re estimating that they will see their health insurance costs increase by $100,000 to $120,000 per year after the full roll-out of the law. Les Wilson said he believes the ‘biggest obstacle’ for them may be primarily from rising costs of premiums from their insurer. ‘That’s going to be where a significant amount of costs come from…,’ he said. ‘I think it’s a knee-jerk reaction to the uncertainty.’” (Laura Oleniacz, “Durham Two Men And A Truck Franchisees Lobby Lawmakers,” Herald Sun, 9/23/13)

Mike Bidwell, President Of The Dwyer Group, Which Owns A Number Of Franchise Brands, Has “Never Talked To Any Business Owner That Has Been Enthusiastic” About Obamacare. “I have never talked to any business owner that has been enthusiastic about it,’ says Mike Bidwell, president of The Dwyer Group, a holding company for several service-based franchises, including Aire Serv and Mr. Rooter. ‘I have never seen anything that has resulted in such a unified negative response.’” (Kate Taylor, “Franchisees Fear Obamacare as Uncertainty Paralyzes Growth,” Entrepreneur, 10/1/13)

Fact #2: More than 50 percent of both franchise and non-franchise businesses with 40-70 employers plan to make personnel decisions to stay below the 50 full-time equivalent employee threshold.

Sean Falk, A Salsarita’s Fresh Cantina, Great American Cookies, Mrs. Field’s Famous Brands And Pretzelmaker Franchisee, Says The ACA May Force Him To Reduce Employee Hours To Keep His Doors Open. “Currently, I employ 43 full-time equivalent employees. If my business grows and I create more jobs, I will also drastically increase my costs due to the employer mandate. This has an undeniable impact on my bottom line and is making me reconsider opening new locations…Also, I may be forced to reduce my employees’ hours to less than 30 hours per week so that they do not acquire full-time status. With these challenges and changes, I fear that it may be a struggle just to keep the doors open on my 12 existing businesses.” (Sean Falk, Remarks At U.S. House Of Representatives Committee On Small Business, Washington D.C., 2/13)

Sam Ballas Of East Coast Wings Company Found That Franchisees With Three To Five Units Will See Huge Cost Increases With Obamacare – Forcing Those With Fewer Than Three Units To Stay There. “Mr. Ballas’s company studied the past two years of financial data from its restaurants, and modeled how many units a franchisee could own and remain profitable after covering full-time workers. The model showed that franchisees who operate in three or fewer stores are likely to remain under the mandatory insurance threshold, while an owner who manages five restaurants efficiently would have just enough scale to offset the cost of paying for insurance or the penalty.” (Julie Jargon, “Eateries Fear Health Law’s Bite,” WSJ, 5/14/13)

Mary Kennedy Thompson Of Mr. Rooter Plumbing Argues The 30-Hour Definition Of Full-Time Will Require Business Owners Like Her To Limit The Number Of Full-Time Hires. “As I travel the United States speaking with franchisees in markets large and small, the ACA is the top concern of those small-business owners. While the employer mandate was delayed, there are still serious concerns for small-business owners, in particular the requirement that employers with at least 50 full-time employees offer health insurance to those working at least 30 hours a week — as opposed to the traditional 40-hour workweek. Many ask how a 30-hour workweek ever came to be seen as full time. The impact of this future rule causes employers like me and my franchisees to not only limit the number of full-time employees hired, but also cut current employees’ hours to avoid that 30-hour threshold.” (Mary Kennedy Thompson, “Small Businesses Have Full-Time Problem With Affordable Care Act,” Waco Tribune, 10/13)

Bob Funk, President Of Express Employment Services, Which Provides Businesses With Temporary Work, Says That Obamacare Is A Boon For His Business But Bad For The Economy. “‘Obamacare has been an absolute boon for my business,’ he says as we sit in his new office headquarters near downtown Oklahoma City. ‘I’m making a lot of money thanks to that law. We’re up 8% this year. But it’s just terrible for the country. I see that firsthand every day.’ Why is the health care law good for Express but bad for the country? ‘Firms are just very reluctant to hire full-time workers,’ Mr. Funk says. ‘So they are taking on more temporary help, which is what we do.’” (Stephen Moore, ” Where The Jobs Are—And How to Get One,” WSJ, 9/20/13) 

Fact #3: A return to the traditional definition of a full-time worker will increase the ability of businesses to grow and give employees more flexibility on hours.

Stephen Bienko Of College Hunks Hauling Junk Argues That By Returning To The Traditional Definition Of Full-Time, Employers Would Be Provided Flexibility To Give Part-Time Workers More Hours And Pay Them More Wages. “For decades, employers have used a 40-hour workweek as a standard for workforce culture, and continuing this would eliminate the need to revamp longstanding employer personnel policies… For my part, I would be able to give my part-time employees more hours and pay them more wages without incurring additional costs.” (Stephen Bienko, Remarks At U.S. House Of Representatives Committee On Small Business, Subcommittee On Health And Technology, Washington D.C., 10/9/13)

Andrew Puzder, CEO of CKE Restaurants, Points Out That The Logic Is Simple – Making Full-Time Employment More Expensive Will Result In More Part-Time Work. “The logic for businesses is simple. If you have three employees working 40 hours per week they will produce 120 labor hours. Five employees working 24 hours per week also produce 120 labor hours. Employers must offer the three full-time employees health insurance or pay a penalty. They have no such obligation to the five part-time employees, making part-time employment less costly. Make something more expensive and employers will use less of it; make something less expensive and they will use more of it. This unintended consequence of Obamacare must be addressed. The bipartisan ‘Forty Hours Is Full Time Act’ introduced in the House and Senate earlier this year offers a viable solution.” (Andrew Puzder, Obamacare and the Part-Time Economy,” WSJ, 10/10/13)

Don Fox, CEO Of Firehouse Subs, Argues That The 30-Hour Definition Undermines The Flexibility Of Scheduling That Provides Employees Convenience And Opportunity To Earn More Money. “Put plainly, the ACA undermines the flexibility of scheduling that has helped ensure a quality dining experience for customers, not to mention provided employees the convenience of flexible schedules and the ability to earn more income as their time permits. Employees throughout the restaurant industry have embraced and enjoyed this benefit for decades, and they are about to lose it.  As it stands, the net effect of these requirements will be a limitation of the earning potential of the 13.1 million of American who work in the restaurant industry.” (Don Fox, “Obamacare’s Acute Affliction On Restaurant Workers,” Forbes, 9/12/13)

Read more about how Obamacare will hurt employers and employees at Free Enterprise.