Despite the current administration’s aggressive pro-growth overhaul of federal regulations, a major drag on economic growth remains in the form of a little-known Obama-era labor rule.
In 2015, the National Labor Relations Board broadened the “joint employer standard” so that more and bigger companies could be held responsible for employment conditions in separate businesses. While seemingly innocuous, this regulation demonstrably slows job growth, impacts nearly half the labor force, and, contrary to the NLRB’s intent, primarily benefits high-wage workers.
Think the Trump administration will be able to quickly do something about it? Think again. Due to conflict-of-interest concerns about a Trump-appointed member, the NLRB failed to repeal the broadened standard through its typical case-decision process. Now, the NLRB is resorting to a lengthy public rulemaking, meaning the broadened joint employer standard will likely remain the law of the land for at least the next few years, absent congressional action. Such a delay could prove costly: The broadened joint employer standard poses a major risk to the economy and the workforce.
The broadened joint employer standard inherently reduces the incentive for firms to enter business franchise relationships, lowering productivity and costing jobs in contract and franchise companies. Making matters worse, the NLRB’s new standard is highly ambiguous. It holds companies as joint employers if they have “direct or indirect control” of employment and pay in separate firms. The new standard has created significant uncertainty about which firms are joint employers, as “direct or indirect control” could apply to any number of business arrangements. As a result, production is likely lower than it otherwise might be, as a large number of firms could become unnecessarily reluctant to enter business arrangements or limit coordination between themselves and another firm’s workers.
These negative effects are not merely hypothetical. They have been well-documented in the franchise sector, which is also directly affected by the broadened joint employer standard. Since the NLRB introduced the broadened joint employer standard, growth in hotel franchise jobs has nearly halted, causing job growth in the entire hotel industry to slow. And there is no reason this effect is limited to hotel franchises. In 2017, franchises employed 8.6 million workers, representing 7 percent of private sector payroll workers. The broadened joint employer standard could ultimately cost 1.7 million franchise jobs over the next decade.
These job losses could be spreading to the U.S. economy as a whole. The broadened joint employer standard is so ambiguous that it upends the entire domestic supply chain, incentivizing firms to perform more tasks in-house. In a new American Action Forum study, I found that the broadened standard affects 44 percent of private sector employees or 54.6 million workers, most of whom work in the supply chain.
The broadened joint employer standard’s impact on the supply chain carries significant economic risks beyond job loss within supply-chain companies. Supply-chain companies add considerable value to the economy by virtue of providing highly specialized services. Companies outsource those tasks because specialized contractors are able to perform the same duties more efficiently, lowering business operating costs. Additionally, the services that supply chain companies specialize in are themselves highly valuable, with many employees working in science, technology, engineering, and mathematics. The sheer size of the supply chain and its workers’ skills indicate that a reduction in outsourcing and consequently productivity would substantially slow economic growth. Although the economy is strong right now, the broadened standard undermines sustained robust economic growth, something the United States desperately needs.
Finally, the data suggest that the NLRB’s rationale for broadening the joint employer standard in 2015 was misplaced. Proponents of the broadened joint employer standard assume that supply-chain workers are worse off than those in the rest of the economy. Many believe that as employers outsource tasks — e.g. janitorial, security, and delivery — a broad swath of the labor force is facing a “fissured workplace,” resulting in stagnating wages.
But the evidence indicates the exact opposite. Workers in supply-chain companies have significantly higher average earnings than their counterparts in the rest of the economy. In 2013, supply-chain workers made $61,700 on average — 57 percent higher than the $39,200 earned by everyone else.
The evidence does not speak well of the broader joint employer standard. At best, the regulation adds labor protections mostly for workers who already earn high average wages, hardly the NLRB’s intent. At worst, it undermines a massive and highly valuable portion of the economy.
Ben Gitis is director of labor market policy at the American Action Forum.
