The American workforce is still reeling after a pivotal ruling by the National Labor Relations Board last week, which redefined what it means to be a joint employer.
Settling a disagreement between Browning-Ferris Industries and the staffing agency that provided the center’s workers, the NLRB asserted that companies using workers hired by another business — contractors, temp agencies, fast-food franchisees, etc. — are now considered joint employers.
This means that businesses that subcontract are now responsible for workplace violations, and may even have to negotiate with labor unions on behalf of contract workers.
Before the ruling, companies were able to protect themselves from lawsuits by deferring liability to the third-party employers recruiting their workers. Now that that’s changed, businesses are going to have to take a hard look at their relationships with staffing agencies and contractors, particularly the companies that have evaded collective bargaining by outsourcing work.
What Does the NLRB Ruling Mean?
Worker advocacy groups like Teamster, which filed the original complaint in Silicon Valley, are ecstatic because it’s now much easier to organize unions, as well as recruit from a larger pool of workers.
But among those nervous about the ruling’s implications are organizations that have boosted productivity over the years by utilizing long-term outsourced staffing.
Hotel chains like Hilton (HLT), Starwood Hotels & Resorts (HOT) and Marriott (MAR), for example, may see incremental drag if the labor pool organizes.
But that’s a pretty big “if.”
While workers now have more breathing room to engage in collective bargaining, the third-party employer structure hasn’t exactly been conducive to that up until now. That’s because hired hands tend to go where the highest-paying work is — they don’t stay in one place and try to negotiate a better deal.
Large restaurant chains may be the exception, and will have to reorient themselves. The franchise model can be very profitable for everyone, but when expenses start to rise, the franchisee — who is essentially a small-business owner — ends up with the short end of the stick, as do employees.
Aggregate franchise employment has a lot of built-up pressure to unionize, especially amid the recent outcry for wage increases. But this ruling may ultimately be more of a negative for chains like McDonald’s (MCD) and Dunkin’ Brands (DNKN) than corporate-owned analogues like Starbucks (SBUX), where everyone is already eligible for benefits and everything’s groovy.
Frankly, this ruling is probably better for franchise operations than a flat minimum-wage hike, because chains that invest in labor loyalty can reap the rewards by simply not antagonizing workers into the union mindset.
So now more than ever, exporting jobs overseas or hopping on the automation trend have become attractive prospects.
Automation at the minimum wage level — point of sale systems, self-checkout at grocery stores, online customer ordering — makes it possible to maintain margins while paying fewer people a better wage and benefits. Still, however, it’s a back-end evolution that will play out over the long-term, not the sudden end of the world scenario that some have made this ruling out to be.
In the here and now, all the National Labor Relations Board’s ruling does is take a slice of the bargaining risk off of the staffing companies — the ManpowerGroup’s (MAN) and Adecco’s of the world — and hand it back to the hiring organizations.
If they want to ensure unionization doesn’t happen on either side of the relationship, both partners will need to work together to get labor friendly deals.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
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