In an unexpected move, California, known for its progressive labor policies, has rejected a state-level version of the National Labor Relations Board’s (NLRB) new joint employer rule. This decision reflects the broader national sentiment of economic uncertainty, as evidenced by a recent CNBC survey where nearly 70% of Americans expressed negative views about the economy’s health.

The Joint Employer Rule

The joint employer rule, central to the Biden Administration’s economic regulation efforts, has long been supported by influential labor unions like the Service Employees International Union. Its purpose is to restore and expand an Obama-era standard, impacting businesses across America, particularly those operating under a franchise model. President Biden, known for his pro-union stance, saw his appointees at the NLRB push this regulation forward in late October, among party lines voting.

Economic Impacts of the Rule

The introduction of the joint employer standard in 2015 under the Obama Administration led to significant economic consequences. It resulted in losing 376,000 jobs and a spike in litigation by 93%. The franchise sector, which is responsible for more than 8 million jobs and contributes nearly $1 trillion to the U.S. economy, was particularly affected. This sector is crucial for creating business ownership opportunities and building generational wealth among key demographic groups, including minorities, women, and veterans, which the Biden administration frequently highlights.

Changing Dynamics in Franchising

The expanded joint employer rule changes the relationship between over 3,000 franchisors and 800,000 franchisees. Previously, franchisees independently managed their businesses, making all crucial hiring, management, and scheduling decisions. Under the new rule, franchisors are now responsible for the actions and welfare of approximately eight million employees working for franchisees nationwide. This shift reduces franchisees to mere intermediaries, stripping them of their ability to autonomously manage their businesses and employees.

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Reactions and Consequences

This regulatory change has led to concerns among franchisees, with a study by Oxford Economics revealing that 74% of franchisees were highly concerned about increased franchisor control. The rule poses a threat to the autonomy of these small business owners, with many indicating they would have needed to start their businesses under these conditions.

In California, the proposed state-level joint employer standard met significant resistance from small business owners. Despite California’s history of ambitious regulations in other areas, Governor Gavin Newsom’s decision to withdraw the policy underscores the rule’s unpopularity.

National Response and Efforts

Nationally, there is a concerted effort to prevent the implementation of the federal joint employer rule. A bipartisan group of lawmakers has introduced legislation to repeal the rule, gaining support from over 70 organizations. Additionally, a diverse coalition of business groups has taken legal action against the rule.

Implications and Future Outlook

The rejection of the joint employer rule by California, coupled with the national initiatives to halt its implementation, underscores the contentious nature of this regulation. Opponents argue that the rule could destabilize the franchise model, a critical driver of local economies and job creation. As the United States continues to navigate economic challenges, the debate over the joint employer rule highlights the complexities of regulatory actions and their impact on small business owners and the broader economic environment.