[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]


RISKY BUSINESS: EFFECTS OF NEW JOINT EMPLOYER STANDARDS FOR SMALL FIRMS

=======================================================================

                                HEARING

                               BEFORE THE

       SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             MARCH 17, 2016

                               __________
                               
                               
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                 Small Business Committee Document Number 114-050
                   Available via the GPO Website: www.fdsys.gov
                   
                   
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                      STEVE CHABOT, Ohio, Chairman
                            STEVE KING, Iowa
                      BLAINE LUETKEMEYER, Missouri
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                         CHRIS GIBSON, New York
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        CARLOS CURBELO, Florida
                          MIKE BOST, Illinois
                         CRESENT HARDY, Nevada
               NYDIA VELAZQUEZ, New York, Ranking Member
                         YVETTE CLARK, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                       BRENDA LAWRENCE, Michigan
                       ALMA ADAMS, North Carolina
                      SETH MOULTON, Massachusetts
                           MARK TAKAI, Hawaii

                   Kevin Fitzpatrick, Staff Director
             Emily Murphy, Deputy Staff Director for Policy
                       Jan Oliver, Chief Counsel
                  Michael Day, Minority Staff Director
                           
                           
                           C O N T E N T S

                           OPENING STATEMENTS

Hon. Cresent Hardy...............................................     1
Hon. Alma Adams..................................................     2

                               WITNESSES

Mr. Vinay Patel, President and CEO, Fairbrook Hotels, Chantilly, 
  VA, testifying on behalf of the Asian American Hotel Owners 
  Association....................................................     4
Mr. Danny Farrar, CEO and Founder, SoldierFit, Frederick, MD, 
  testifying on behalf of the Coalition to Save Local Businesses.     5
Mr. Harris Freeman, Professor of Legal Research & Writing, 
  Western New England School of Law, Springfield, MA.............     7
Mr. Kurt Larkin, Partner, Hunton & Williams LLP, Richmond, VA....     9

                                APPENDIX

Prepared Statements:
    Mr. Vinay Patel, President and CEO, Fairbrook Hotels, 
      Chantilly, VA, testifying on behalf of the Asian American 
      Hotel Owners Association...................................    21
    Mr. Danny Farrar, CEO and Founder, SoldierFit, Frederick, MD, 
      testifying on behalf of the Coalition to Save Local 
      Businesses.................................................    28
    Mr. Harris Freeman, Professor of Legal Research & Writing, 
      Western New England School of Law, Springfield, MA.........    33
    Mr. Kurt Larkin, Partner, Hunton & Williams LLP, Richmond, VA    40
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    ABC - Associated Builders and Contractors, Inc...............    62
    AGC - Associated General Contractors of America..............    63
    AHLA - American Hotel and Lodging Association................    65
    IEC - Independent Electrical Contractors.....................    68
    IFA - International Franchise Association....................    70
    IWLA - International Warehouse Logistics Association.........    78
    National Restaurant Association..............................    80
    NATSO - National Association of Truckstop Operators..........    83
    NFIB - National Federation of Independent Business...........    89

 
RISKY BUSINESS: EFFECTS OF NEW JOINT EMPLOYER STANDARDS FOR SMALL FIRMS

                              ----------                              


                        THURSDAY, MARCH 17, 2016

                  House of Representatives,
               Committee on Small Business,
     Subcommittee on Investigations, Oversight and 
                                       Regulations,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building. Hon. Cresent Hardy 
[chairman of the Subcommittee] presiding.
    Present: Representatives Hardy, Chabot, Kelly, Velazquez, 
and Adams.
    Chairman HARDY. Good morning. Thank you for being here. I 
call this meeting to order.
    Owning your own business and being your own boss is part of 
an American dream. Many Americans pursue that dream by using 
proven business models, like subcontracting and franchising, 
which results in the successful businesses that provide jobs 
for millions of Americans. However, the National Labor 
Relations Board and the Department of Labor are threatening 
those business models by changing their joint employer 
standards. Being deemed a joint employer has huge 
ramifications. If two businesses are determined to be joint 
employers, one could be held liable for the other's compliance 
with the Federal labor laws.
    Last year, the NLRB issued a decision that changed its 30-
year-old joint employer standard. Under the new standard, two 
companies could be classified as a joint employer based on the 
mere potential to control the terms of the conditions of 
employment. In January, the Department of Labor issued joint 
employer guidance. The DOL effectively abandons the existing 
Fair Labor Standards Act regulations by declaring that it will 
apply economic realities test to determine if there is a joint 
employer relationship. These ambiguous standards are injecting 
more uncertainty into a variety of business relationships. 
Because of increased liability, larger companies may try to 
reduce the risk by asserting more control over small businesses 
that they contract with or ending business relationships. 
Business models that have provided entrepreneurs with the 
opportunity to live the American dream may no longer be viable. 
I believe these misguided policy changes are a threat to small 
businesses and need to be reconsidered before significant 
damage is done to this vital sector in the American economy.
    I appreciate all the witnesses being here today. I look 
forward to your testimony, and I yield to Ranking Member Adams 
for her opening remarks.
    Ms. ADAMS. Thank you, Mr. Chair.
    Prior to 1935, workers had few rights to freely engage in 
activities to improve working conditions or pay. As a result, 
less than 10 percent of the population was unionized. With 
enactment of the National Relations Labor Act and creation of 
the National Relations Labor Board that year, workers' rights 
were greatly improved. Union membership tripled by the 1950s. 
Today, however, participation has slipped to nearly pre-NLRA 
levels, just 12 percent of the workforce. This drop in worker 
organization has coincided with a desire by businesses to 
distance themselves from the workforce through the use of 
contractors and temporary staffing agencies. Currently, over 
3.4 million workers are temporary status, while millions more 
work for contractors. This business-to-business arrangement 
primarily benefits the parent company. They can shift the 
burden of dealing with payroll, benefits, and most importantly, 
compliance with the NLRA, to the contractor. This sharp 
increase in nontraditional employment has coincided with a 
change in the joint employee standard in the early 1980s. At 
that time, the Republican-led NLFB articulated a new, stricter 
definition of what constitutes a joint employer where the 
parent company had to have direct control over operations, 
hours, or working conditions to be liable for violations of the 
NLFA. After the ruling, the use of temps and contractors grew 
and workers' rights suffered.
    In an effort to better protect vulnerable workers, the NLRB 
recently changed course on how to determine when multiple 
companies are joint employers. The new test announced in 
Browning-Ferris no longer requires that both employers actually 
exercise the authority to control terms and conditions of 
employment. Instead of both our employers within the meaning of 
the common law and share in determining the essential terms and 
conditions of employment, they will be deemed joint.
    The reaction to the ruling has been mixed. Labor rights 
experts have lauded the decision as a return to the original 
intent of the law. They also contend the shared responsibility 
under the recent decision should result in better oversight and 
compliance with important labor laws. The impact on workers is 
particularly important, and I am eager to hear from today's 
witnesses on this issue. Critics, on the other hand, claim the 
change will negatively impact the small-business community. 
However, bringing the larger corporation to the bargaining 
table could provide small businesses with support and resources 
that they would otherwise not have in labor disputes before BFI 
decision.
    I look forward to hearing from our witnesses today 
regarding this concern, and one thing that both sides seem to 
agree on is that it will have an impact on unionizing. With the 
NLRB indicating the previous standard was too restrictive, 
allowing companies to skirt labor laws and collective 
bargaining rights, unions are likely to be embroiled to bring 
more joint employers to the bargaining table. I think we can 
all agree that it is important for businesses to follow 
applicable labor laws. I hope we can use today's hearing to 
explore how the BFI case and subsequent developments at the 
Department of Labor will impact both workers and businesses, 
and I look forward to hearing from the witnesses. I thank you 
for your participation today. I yield back, Mr. Chair.
    Chairman HARDY. Thank you.
    Okay. If Committee members have any opening statements 
prepared, I ask that they be submitted for the record.
    I would like to explain how things work around here. You 
have a light in front of you. You will each have 5 minutes to 
deliver your testimony. That light will turn green when you 
start and with 1 minute remaining, the light will turn yellow. 
Finally, at the end, it will turn red after the 5 minutes. I 
would ask you to adhere to those rules the best you can.
    Now, I would like to do some introductions for our 
witnesses. First, we have Mr. Vinay Patel, president and CEO of 
Fairbrook Hotels in Chantilly, Virginia. He has received 
several hospitality industry awards, including the Presidential 
Award by Carlson Companies for the Country Inn and Suites for 
achieving the highest level of operation of excellence. Mr. 
Patel holds a bachelor of science in marketing and business 
administration from Virginia Commonwealth University, and is 
testifying on behalf of the Asian American Hotel Owners 
Association (AAHOA). Thank you, Mr. Patel for being here.
    Up next we have Mr. Danny Farrar, CEO of SoldierFit, a 
fitness company that he co-founded in 2013. Mr. Farrar is an 
Army veteran who served in Iraq. SoldierFit, which is based in 
Frederick, Maryland, is about to open its fourth location and 
recently awarded two franchises. In addition, SoldierFit was 
just named as the Eastern region's finalist for the U.S. 
Chamber of Commerce Annual Dream Big Small Business of the Year 
Award. He is testifying on behalf of the Coalition to Save 
Local Businesses. Mr. Farrar, thank you for your service, and 
thank you for being here. We appreciate everything you do here 
today.
    With that, I yield to Ranking Member Adams for her 
introduction of the next witness.
    Ms. ADAMS. Thank you, Mr. Chair.
    Harris Freeman is a professor of legal research and writing 
at Western New England University School of Law and a visiting 
professor at the Labor Relations and Research Center at the 
University of Massachusetts. He has taught labor and employment 
law since 1999, and in 2009, Governor Patrick appointed 
Professor Freeman to the Commonwealth Employment Relations 
Board, the appellant agency body that oversees public sector 
labor relations in Massachusetts. He served on that body until 
2016. Professor Freeman's writings on labor and employment law 
have appeared in numerous reviews and labor study journals, 
including the Employee Rights and Employment Policy Journal, 
and Working USA, a journal of labor and society. Mr. Freeman, 
we welcome you today.
    Chairman HARDY. Thank you. Our final witness is Mr. Kurt 
Larkin, a partner in Hunton and Williams in Richmond, Virginia. 
There he helps businesses of all sizes solve labor and 
employment challenges. Mr. Larkin previously served in the 
United States Army, Judge Advocate General Corps, and received 
the Meritorious Service Medal, the Army Commendation Medal, and 
the Global War on Terrorism Service Medal. He has received a 
law degree from Temple University and his bachelor's degree 
from Dickinson College. Mr. Larkin, thank you for your service, 
and thank you for being here today.
    With that, Mr. Patel, we will start with you, and we have 5 
minutes. Thank you.

STATEMENTS OF VINAY PATEL, PRESIDENT AND CEO, FAIRBROOK HOTELS; 
  DANNY FARRAR, CEO AND FOUNDER, SOLDIERFIT; HARRIS FREEMAN, 
 PROFESSOR OF LEGAL RESEARCH AND WRITING, WESTERN NEW ENGLAND 
  SCHOOL OF LAW; KURT LARKIN, PARTNER, HUNTON AND WILLIAMS LLP

                    STATEMENT OF VINAY PATEL

    Mr. PATEL. Chairman Hardy, Ranking Member Adams, members of 
the Committee, I would like to thank you for the opportunity to 
testify before you today and to share with you my experience as 
a small-business owner. I look forward to a constructive 
discussion about how the new joint employer standard will 
negatively impact my business.
    My name is Vinay Patel. I am a first-generation American 
and proud small business owner from Herndon, Virginia. I am 
appearing today not only as a hotelier but also as a volunteer 
board member of the Asian American Hotel Owners Association. 
AAHOA represents more than 15,000 small business owners who own 
nearly 50 percent of all hotels in the United States.
    My story is just like that of thousands of first and 
second-generation American entrepreneurs. I was born in Malawi, 
Africa, to parents of Indian origin. My family moved to the 
United States in 1980 and bought a small, 27-room motel. We 
lived at this motel and did everything, from cleaning rooms to 
maintenance, and I would pop out of my living room to rent 
rooms to guests that would come in. This is where I learned the 
most important lessons in life of hard work, commitment to 
family, and community service. After graduating from college, 
we built a second property from the ground up, a 15-room Royal 
Inn Motel, where my wife Tina and I ran the motel and did every 
aspect of the business.
    After running the motel for 2 years, I decided it was time 
to take a risk and grow the company, so I began to look for 
opportunities in franchise hotels. While my ambitions were 
high, so too were the hurdles. Brand after brand turned me down 
due to lack of experience in franchise properties. After 
struggling to find a brand partner, Carlson Hotels took a 
chance on me and I was able to open up the first Country Inn 
Suites in Virginia in 1995, creating 15 new jobs. Today, I have 
11 hotels between Maryland and Virginia and work with major 
brands, including Carlson, Hilton, IHG, Wyndham, Choice Hotels, 
and proud to employ over 150 associates.
    I have explained my history in the hotel industry to show 
you how difficult it is to succeed as a small-business man. For 
this reason, the new joint employer standards are very 
concerning. Having faced challenges of two unbranded properties 
to start my career, franchising provided me the best business 
model to expand my operations and create hundreds of jobs. As a 
franchisee, I pay a license and royalty fee. In return, I 
display a nationally recognized sign on our property and 
benefit from a wide-reaching marketing campaign and a frontline 
reservation system.
    Most importantly, I own and operate my own small business. 
I take all of the financial risk. I make all of the day-to-day 
decisions at the hotels. The franchise business model is the 
best vehicle for small business ownership in the lodging 
industry. Changes in this model would discourage 
entrepreneurship and create uncertainty between employers and 
employees. The standard of the employer liability that existed 
for more than 30 years was simple, clear, and concisely defined 
and defined the relationship between employees and me.
    Under the new standard, franchisors may be subject to 
liability based on actions of franchisees. As a result, they 
will likely choose to work with larger franchisees and forego 
small business owners like myself. They would have no choice 
but to exert control over the daily operations of my business. 
I would cease to be an independent small business owner and 
would be subject to the directives of a large corporation. 
Ultimately, I would become a de facto employee of a corporate 
brand.
    Most threatening to my business is the Department of 
Labor's characterization of employer labor. The Administrator's 
interpretation directly takes aim at the hospitality industry. 
It suggests that I jointly employ my staff with the franchisor, 
simply because they are wearing shirts bearing the name of the 
national brand.
    As I mentioned before, the license agreement allows me to 
use the logo for marketing. Ultimately, I employ my team. I 
sign their paychecks, regardless of what logo is on their 
shirt. In my experience, there is no circumstance in which the 
national brands dictate the tasks of my employees.
    Frankly, if these burdensome circumstances existed when I 
entered the business, I would not have chosen the 
entrepreneurship path. The new rule threatens my ability to own 
and operate my business, to create and maintain good jobs, and 
the stability of a franchise model.
    Chairman Hardy, Ranking Member Adams, and the distinguished 
members of the Committee, I thank you for the opportunity to 
speak today. I urge this Committee to pass legislation that 
would reestablish the traditional joint employer standard that 
has allowed my family to realize the American dream of small 
business ownership. Thank you.
    Chairman HARDY. Thank you for your testimony.
    Mr. Farrar?

                   STATEMENT OF DANNY FARRAR

    Mr. FARRAR. Good morning, Chairman Hardy, Ranking Member 
Adams, and distinguished members of the Subcommittee. My name 
is Danny Farrar, and I am the CEO and co-founder of SoldierFit. 
I am humbled by your invitation to speak on behalf of hundreds 
of small business owners like myself, who are members of the 
Coalition to Save Local Business.
    Mr. Chairman, I am an 8-year military veteran who served in 
the United States Army, including a combat tour in Iraq; a 
former firefighter and EMT; and a certified personal trainer 
with over a decade of experience. Today, I am a small business 
owner and entrepreneur. We operate three gyms in Maryland and 
will soon open our fourth. I am also a franchisor. We recently 
awarded our first two franchises to further grow our concept. 
So while some people hear the term franchise or franchisor and 
think only of major corporations, they can also think of me, my 
small business, and my story, and the story of hundreds of 
thousands of both franchisors and franchisees who are small 
business owners.
    Together with my friend and one-time mentor, Dave Posin, I 
co-founded SoldierFit, a fitness company committed to the 
ideals of community, patriotism, and pursuit of the American 
dream. I am also the president and co-founded of Platoon 22, a 
nonprofit started to combat the depression and dislocation that 
at least 22 veterans a day take their own lives. We are helping 
brave service men and women who have charged into combat on 
behalf of our Nation only to return scarred physically, 
mentally, or both, just as I once was.
    So as you can see, I have held many positions throughout my 
life, and the threat of unlimited, unpredictable joint employer 
liability is very scary. It threatens everything my partners 
and colleagues have worked for in order to build our community.
    While today I appear before you as a small business leader, 
my road here was long and challenging. Mr. Chairman, I was 
adopted at age 2. I graduated from high school 146 out of 147. 
I left for boot camp after graduation, and on September 11, 
2001, I took the first team for the Army into the Pentagon to 
aid in search and rescue for survivors and remains. In the days 
that followed, I took jobs here and there but I soon ended up 
homeless. I once again turned to the military and deployed to 
Iraq where I completed over 700 convoy missions. I have been 
blown up and shot at at just about any place you can get blown 
up and shot at. When I returned home I hit rock bottom. I 
drank, I self-medicated, and ultimately decided that my life 
was not worth living and attempted suicide. Somehow I got a 
second chance.
    Today I lead a company that has been the recipient of 
several small business awards from the U.S. Chamber of Commerce 
in the State of Maryland, as well as I was featured on the 
cover of Men's Health magazine. I have gone from the kid who 
barely graduated high school to giving the commencement address 
at one. But Mr. Chairman, the National Relations Labor Board 
threatens everything that I and millions of small-business 
owners have built. When the NLRB decided to change the joint 
employer liability standard in August of 2015, it was a scary 
moment for local business owners like myself. For decades, the 
joint employer standard had protected businesses like mine from 
the liability of employees over which we have no actual or 
direct control. That has always made sense. But now in adopting 
this new, ambiguous, indirect, and even reserve control 
standard, the NLRB has made employers potentially liable for 
employees they do not employ. That is nonsense.
    Mr. Chairman, from the perspective of small business, it 
appears that Washington regulators are attempting to facilitate 
a corporate takeover of Main Street. If regulators make large, 
primary companies liable for the employment actions of third-
party vendors, suppliers, franchisers, or subcontractors over 
which they have no direct control, large companies may be 
compelled to exercise more control over these small businesses 
to limit their new liability. Consequently, local business 
owners may effectively be demoted from entrepreneur to middle 
manager as they are gradually forced to forfeit operational 
control of their stores, clubs, inns, or restaurants that they 
built. Thus, the joint employer means big companies will get 
bigger and small business may run out of business partners and 
ultimately fade away.
    On another note, Mr. Chairman, many local business owners 
are nervous about the implications of joint employer on their 
future access to capital. The members of this Subcommittee well 
know that the Small Business Administration Loan Guaranty 
Program is critical for creation of growth of small business, 
as it was for SoldierFit. But as SBA considers changes to its 
loan approval process, it is important for the agency to keep 
in mind, however, anti-small business federal agencies are 
changing the definition of joint employer and how they may 
reduce that access to capital.
    I urge the Subcommittee members to protect small 
businesses' access to SBA loan guarantees. The bottom line on 
the joint employer as a threat to small business, Mr. Chairman, 
is this: no one can assure me that my business, or anyone 
else's business, may not run afoul of a vague, joint employer 
liability standard based on indirect or even unexercised 
reserved control. That is why I and so many small business 
owners around the country need help. We are asking Congress to 
pass a simple, once in its legislation contained in H.R. 3459, 
the Protecting Local Business Opportunity Act.
    Mr. Chairman, this country allowed me to achieve the 
American dream, and I found a small business committed to 
enabling others to achieving their American dream. Please 
protect small businesses like mine and give us certainty that 
federal agencies in Washington are not going to needlessly 
threaten our business.
    Mr. Chairman, thank you for your leadership on this issue, 
and I would be happy to answer any questions you have. God 
bless.
    Chairman HARDY. Thank you, Mr. Farrar.
    Mr. Freeman?

                  STATEMENT OF HARRIS FREEMAN

    Mr. FREEMAN. Good morning. I would like to thank chairman 
of the Subcommittee, Congressman Cresent Hardy, Ranking Member 
Congresswoman Alma Adams, and the other members of the 
Subcommittee for this opportunity. I have two points to make 
this morning.
    First, the more inclusive joint employer doctrine adopted 
by the NLRB and Browning-Ferris was an appropriate response to 
the rapid expansion of subcontracting and precarious low-wage 
work. Second, the BFI joint employer standard will do no harm 
to America's small businesses even as it provides a potential 
path to meaningful collective bargaining for a significant 
sector of the low-wage workforce.
    I begin my remarks by focusing on the industrial realities 
of low-wage temping and franchising arrangements because it is 
believed that BFI will have an impact on employment in these 
arenas.
    Temporary staffing and franchising account for a 
disproportionate share of the economic growth since the Great 
Recession of 2008. Close to 3 million employees working temp 
positions and another 2.8 million working just the fast food 
sector of franchising. And while profits are high in these 
sectors, poverty-level wages, underemployment, extraordinarily 
high rates of wage theft pervade the temporary staffing 
industry in franchise fast food outlets and janitorial 
services.
    For example, temp workers comprise three-fourths of the 
150,000 workers who load and unload goods at warehouses used by 
Walmart and other big box stores in Chicago. As temps, they 
experience a large wage penalty, earning $9 an hour, $3.48 
lower than direct hires. Two-thirds live below the poverty 
level. Households that include fast food franchise workers are 
four times as likely to live below the poverty level. As a 
result, taxpayers shell out $3.8 billion a year to subsidize 
public benefits for these workers.
    This type of systemic inequality and poverty also hurt 
small business owners. Like their employees, many franchise 
owners--not all, but many--are squeezed by big franchisors who 
impose nonnegotiable terms of engagement on franchise owners 
that tend to push down wages, promote costly churning of the 
workforce, and significantly create high failure rates for 
franchise owners.
    The BFI decision should be understood in this context as a 
proper exercise of the Board's statutory authority, and it is 
in no way radical. The basic joint employment test has not 
changed. It remains a case-specific, fact-intensive inquiry to 
determine whether an employer shares or codetermines the terms 
and conditions of employment.
    What the NLRB did do is return to their traditional joint 
employer test endorsed by the Supreme Court 50 years ago. This 
closed a loophole created by board rulings in the 1980s. Now, 
the inquiry is broader. The Board no longer is limited to 
examining whether an employer controls employees directly and 
immediately; instead, a traditional, multifactor common law 
inquiry is used. The BFI case illustrates how this works. In a 
representation case, the NLRB found that the recycling center 
maintained legal control over 240 long-term temps by issuing 
precise directives to hire, to fire, to control the line speed, 
and other aspects of the work environment. These directives 
were given directly by BFI and through the supervisors of the 
temporary staffing agency onsite.
    The terms of the temporary staffing agreement also 
expressly ceded the right to control the workforce to the 
recycling center. The Board concluded that the recycling center 
was a joint employer because BFI affected the means and the 
manner by which employment was directed there.
    Nothing in this ruling presents a new or heightened level 
of legal uncertainty for large or small employers that use 
temps in staffing. The NLRB has made it clear that a potential 
finding of joint employment arises when the structure of 
staffing arrangements cedes to the user firm an extensive level 
of direct or indirect control over the means and manner of 
work.
    It is also clear that BFI does not predetermine or rig the 
outcome of joint employer inquiry and franchising. This was 
made clear by the General Counsel a year ago in a detailed 
advice memorandum that applied the BFI case to a franchise in 
Nutritionality. The advice memo concluded that the franchise 
agreement and directives did exercise control over brand and 
product quality, but in no way did it exercise any control over 
the terms and conditions of the employees at the franchise 
outlets. The unfair labor practice case was dismissed without a 
hearing.
    A different result may, of course, arise when you have a 
tightly controlled business format franchisee agreement, but 
the Board has not yet addressed and finalized any kind of 
inquiry into this type of scenario, but the Board has provided 
significant guidance for franchisors. The General Counsel has 
said that they should be exempt from a finding of joint 
employment if they are only controlling work conditions to 
support brand quality and the brand name. The statement of the 
General Counsel has recognized that not all franchisors--in 
fact, most franchisors--will not be joint employers.
    In conclusion, it is my view that the Board's revival of 
the traditional joint employer standard is an appropriate 
exercise of the statutory authority granted to it by Congress, 
particularly when considered in light of the NLRB's obligation 
to apply labor law to changing economic realities. It is a 
flexible test for employers and it is also positive and allows 
fair treatment and decent wages for low-wage temp workers.
    Thank you for considering my comments.
    Chairman HARDY. Thank you, Mr. Freeman.
    Mr. Larkin, I apologize. As you heard the alarms, we have 
been called to votes on the floor, so we are going to recess 
for probably--reconvene somewhere around 10 til the hour, so I 
apologize for that. We are in recess.
    [Recess]
    Chairman HARDY. We will reconvene this meeting.
    Mr. Larkin, thank you for waiting, and begin with your 
testimony. You have 5 minutes.

                    STATEMENT OF KURT LARKIN

    Mr. LARKIN. Thank you, Chairman Hardy, members of the 
Subcommittee.
    It is a privilege to be here with you today to talk about 
an issue of critical importance to American small business: the 
executive branch's ongoing efforts to expand the legal 
standards for determining if one business is the joint employer 
of individuals employed by another business.
    For over 30 years, the NLRB adhered to a fairly 
straightforward joint employer standard. The Board treated 
separate companies as joint employers if they shared or 
codetermined essential terms and conditions of employment. The 
Board would look to whether the putative joint employer 
exercised meaningful control over hiring, firing, discipline, 
compensation, supervision, and direction, and whether its 
control over such matters was direct and immediate. This 
standard was easy for businesses to understand and, more 
importantly, to plan for.
    But that all changed this past summer. In August of 2015, 
the Board departed from this precedent in a case called 
Browning-Ferris Industries and announced a test of sweeping 
scope that could redefine the employer-employee relationship 
across all areas of business. Now, under this new test, the 
Board may find a business to be a joint employer where it has 
the mere potential to control the employment terms of another 
business' employees, or where it exercises such control but 
only indirectly. This leads to an obvious question: if a 
putative joint employer never actually exercises direct control 
over the employees of another company, how much retained or 
indirect control is sufficient to establish joint employer 
status?
    Well, the murky guidance provided in the board's opinion 
makes this question virtually impossible to answer. Now, some 
have argued that the Browning-Ferris case dealt with a 
temporary staffing firm and its client and that other business 
models were unaffected by the Board's decision. But the 
potential control and indirect control standards announced in 
the case are broad enough to cover virtually any business 
relationship, including general contractor and subcontractor, 
outsourced service provider and user of outsourced service, 
parent and subsidiary, and franchisor/franchisee.
    The NLRB is not the only federal agency that has waded into 
the joint employer conversation in recent months. This January, 
the Department of Labor's Wage and Hour Administrator issued 
formal guidance on the joint employer standards under the Fair 
Labor Standards Act and the Migrant and Seasonal Agricultural 
Worker Protection Act. The guidance goes into detail on the 
concept of vertical joint employment, which the DOL defines for 
the first time as when the employee of one company is 
economically dependent on another company, which retained the 
services of his or her employer.
    The FLSA regulations do not address this concept. Instead, 
it is addressed in the Migrant Act, a statute with a very 
narrow and specific legislative purpose; to combat the abuse of 
migrant farm labor workers in this country. The DOL's new 
guidance cleverly imports that standard into the FLSA and 
encourages investigators to pursue vertical joint employment 
and wage and hour investigations. The DOL appears to have 
worked on this guidance in secret. They certainly did not 
solicit the input of the employer community.
    Those in favor of these actions claim that expanded joint 
employer liability is a good thing; that it will combat against 
unscrupulous employers who take advantage of the growing 
contingent workforce. That approach assumes, incorrectly in my 
view, that the use of temporary employees is always somehow 
inappropriate. Regardless, these legal standards make no 
exception for the scrupulous employer, whatever that might 
mean, and they sweep with a broad brush across all industries 
and virtually all types of business relationships ensnaring 
arrangements that are perfectly legal and vital to the growth 
and success of small business in this country.
    And as for the Freshii Board memorandum, Board advice 
memoranda are nonbinding, have no effect on how the full Board 
decides a later case, and they do not bind the Board's General 
Counsel. And Freshii was issued prior to the Browning-Ferris 
decision, making it all but obsolete. Ultimately, uncertainty 
over how to deal with the Board's new standard, and perhaps the 
standards of other executive agencies, poses a grave risk to 
small business owners. Larger employers may conclude that they 
are going to be held responsible for the liabilities of their 
suppliers, subcontractors, or franchisees. They must exert more 
control over their day-to-day operations so that they can be 
more aware of and seek to mitigate these liabilities. 
Franchisors would become responsible for matters like who to 
hire, when to fire, how much to pay. Their administrative costs 
would skyrocket.
    On the other hand, small business owners would be relegated 
to middle managers, no longer in control of their ultimate 
business success. These negative effects could cause both sides 
to reconsider their business relationships altogether. And you 
do not need to take my word for it. You have already heard from 
two small business owners this morning who fear those very 
outcomes.
    Members of the Subcommittee, on behalf of the employer 
community, I respectfully submit to you that the Board's 
previous joint employer standard worked well for over 30 years. 
It provided management and labor alike with predictability in 
terms of who was the employer of any given group of employees, 
knowledge that is vital to stable bargaining and effective 
labor relations. The new standard shatters that stability and 
throws both sides into new and unprecedented territory. 
Congress should intervene and return the Board's standard to 
the well-understood rule that existed prior to Browning-Ferris.
    Thank you very much for the privilege of testifying here 
today.
    Chairman HARDY. Thank you for your testimony. We will begin 
our line of questioning. Again, thank you for being here. With 
that, I will start.
    I would like to address Mr. Larkin first. The critical 
question when it comes to the NLRB is how much control makes 
you a joint employer? When will business know the answers to 
the question? In the meantime, what advice have you been giving 
to your clients?
    Mr. LARKIN. Well, the critical question, Mr. Chairman, the 
answer to that, and part of the problem is that there is no 
more bright line standard. So I do not know how to answer that 
question. I have had considerable reflection on that and our 
clients have had considerable worry about that. The board's new 
test provides little to no guidance as to what level of 
retained control, if it is not exercised, will be sufficient to 
make you a joint employer so it is virtually impossible to 
predict what level of control is insufficient under the test to 
make you a joint employer.
    Chairman HARDY. Thank you. Mr. Larkin, also, some folks, 
including Professor Harris, have pointed to the advice memo 
that the NLRB issued that stated Freshii is not liable as a 
joint employer as an indicator that the standard is not as 
broad as the community thinks and the franchise business should 
not be concerned. Can you elaborate on why the Freshii memo is 
not comforting to the franchise businesses?
    Mr. LARKIN. Yes, sir. As I addressed in my remarks, Labor 
Board advice memoranda are nonbinding. They do not bind the 
full National Labor Relations Board, and even in the Freshii 
case, the General Counsel was free to ignore it if he wanted 
to, and the full Labor Board would not have had to rely on it. 
So Board memoranda, advice memoranda do not set Board standard.
    As I said, the memo was issued prior to the issuance of 
Browning-Ferris, so the law on which it relies is now obsolete 
and replaced by Browning-Ferris. So I do not think it provides 
any comfort to those in the franchising business.
    Chairman HARDY. Thank you.
    Mr. Patel, you, in your testimony, indicated that if this 
rule would have existed when you started, that you might have 
looked at another business opportunity. Do you think the 
business climate, other than the one you are doing right now, 
do you think the business climate is discouraging people to 
start businesses?
    Mr. PATEL. If these same rules were applicable 20, 30 years 
ago, I do not think I would be in business. I mean, forget 
looking for a different business. I do not think there is an 
opportunity to do business in terms of what is out there. If 
you look at the story that the Asian American Hotel Owners 
Association, many of the people that came over many years ago, 
we talk about it amongst the community and say, I do not think 
we could do what we did 20, 30 year ago today. The regulations 
that we have, the taxes that are applied to us, I do not think 
you could do what we did 20, 30 years ago in today's 
environment.
    Chairman HARDY. Thank you. So if franchisors today started 
asserting their control and authority over your business today, 
how would that affect your daily operations? And on the other 
hand, franchisors take away some of that guidance that benefits 
you. Could you currently provide some information on how that 
affects you also?
    Mr. PATEL. Running a business today is not easy. I mean, 
dealing with customers, dealing with employees, dealing with a 
lot of other issues that are out there, just running a day-to-
day business is not an easy task. Now you throw in the fact 
that you have got other regulations, not only the governmental 
regulations but if a franchisor comes in and says, hey, you 
have got to do this, the employee has to do this, or whatever 
regulations or whatever things they put upon us from a 
franchisee perspective, that is one more thing that we have to 
worry about. Like I said, today's business is not an easy 
business to operate. That is one more thing that we have to 
worry about and we would not want to.
    Chairman HARDY. Thank you.
    Now turning to Mr. Farrar. SoldierFit has just awarded two 
franchises given the new joint employer standards, and our 
decision today--are you having a difficult time with the 
decision today or are you having a difficult time with how much 
or how little guidance to provide your franchisee?
    Mr. FARRAR. On our end, sir, it is scary. Like I said, the 
law is very ambiguous. Where am I going to overstep that 
bounds? At the same time, when that franchisee is coming to us, 
what are they really purchasing? They are purchasing our 
mistakes if you want to be honest about it because we are going 
to help them navigate past the things that we made mistakes on 
to get to where we are presently much, much faster. But if I am 
sitting there worried about how much advice or how much 
training and when and where our company can help with them, 
then that does give us a moment of pause.
    Chairman HARDY. Thank you.
    With that being said, with all the challenges that you have 
gone through, do you think with this decision today, would you 
have started your operation or franchise the same way today?
    Mr. FARRAR. We probably would not have. We have invested 
already at least $300,000 into this. That is not chump change 
for a small business by no stretch of the imagination. If we 
are sitting down here and all of a sudden we are listed as a 
joint employer, we get 7 percent on what they do. If we all of 
a sudden have to up our back office so that we can actually 
make sure that we have a real finger on the pulse of everything 
that is happening day to day, that is going to cost us a lot of 
money and the return investment is not there, so it would not 
make sense.
    Chairman HARDY. Thank you. Thank you for your testimony. My 
time has expired.
    I will yield to Ranking Member Adams.
    Ms. ADAMS. Thank you, Mr. Chair.
    Mr. Freeman, you mentioned that temporary workers 
experience a wage penalty compared to their permanent 
counterparts. Can you explain what a wage penalty is and why it 
occurs?
    Mr. FREEMAN. Certainly. The use of temporary staffing 
agencies in large and small employers today is often set up to 
charge the user employer a fee per hour for each temp worker 
who is deployed to the user-employer's firm to do the basic 
work of that firm. But the temp worker receives sometimes as 
little as 60 percent of the fee that is paid to the staffing 
agency. That is a huge profit that is made simply for the 
process of deploying a person to do work somewhere else. That 
is the wage penalty.
    The significance of this today is that in wide swaths of 
manufacturing, logistics, food processing, all or significant 
parts of the workforce in many facilities. This goes for Nissan 
plants in Mississippi. It goes for food processing plants in 
New Bedford, Massachusetts, near where I live. They are temp 
workers and they are there permanently. No one grows up and 
wants to say, I want to work for a temp agency for the rest of 
my life. That is what we are now experiencing. That is the wage 
penalty. In those situations you have the classic potential for 
joint employment because it is the user-employer who is setting 
up the facility, deploying the managers, deploying the 
supervisors, that is providing direction, both directly and 
indirectly, for the work that is performed by these temp 
workers. That is what the joint employer standard is set up to 
address. So you can bring the people to the bargaining table 
should workers choose to unionize and have everybody there who 
is responsible for the work conditions. If they are not at the 
bargaining table and you make a demand for an increase in the 
wage, the temp agency can say, well, I cannot give it to you 
because the wage limit is set by the user employer by contract. 
That is exactly what happened in the BFI case.
    Now, this is a totally different situation than what is 
facing Mr. Farrar and Mr. Patel. I do not think from what they 
said that they are joint employers in any way under the Board 
standard, and I do not think that this changes the modus 
operandi of their business at all.
    Ms. ADAMS. Thank you. Is it not the case that common law 
agency provides for both direct and indirect control over terms 
and conditions of employment, and is that not what was decided 
by the BFI case?
    Mr. FREEMAN. Yes. The BFI case, as I said earlier, is 
neither radical or new. It restates the standard that was 
established in the Boire v. Greyhound case back in 1965 and is 
merely a return to a standard that recognizes that the right to 
control, and whether that right be exercised directly or 
indirectly, is part of what constitutes the legal standard for 
control under the common law agency test. There is nothing 
exceeding that that is in the Board standard. Retaining that 
right to control by contract is a critical aspect of what an 
employer does when they draw up a contract with, for example, a 
temporary staffing agency.
    I see nothing unusual about this, and in situations where 
you are not in a position to contract to have that kind of 
control, you are not a joint employer. The problems that I 
identified here, the problems of low wages in situations where 
there might be joint employment, these problems were not 
created by the joint employment doctrine. These problems are 
created by larger economic forces that the Board is now 
exercising its authority to try to set up a situation to give 
workers the opportunity should they so choose to engage in 
meaningful bargaining to affect terms and conditions that are 
created by more than one business entity that they work for.
    Ms. ADAMS. Okay. Let me ask you, Congress is now 
considering H.R. 3459, Protecting Local Business Opportunity 
Act. It has been reported out of the Education and Workforce 
Committee on a party line vote. The bill would limit a joint 
employer to only those who have actual direct and immediate 
control. It is argued that this bill would protect the 
independence of franchisees as independent business owners. But 
is it not possible that the bill would actually have the 
perverse effect of weakening the independence of franchisees?
    Mr. FREEMAN. Well, certainly, because what that does, it 
completely eliminates the possibility of a franchisor ever 
being a joint employer and taking responsibility for terms and 
conditions of employment that it is creating through the 
franchising agreement it has with a franchisee. This is going 
to free up the franchisor to increase the degree of control it 
may have over franchisees. I do not think that is what 
franchisees would want. I think this, as you say, may have a 
rather perverse effect and may do exactly the opposite of what 
some of the bill's sponsors intend. I do not think it is a good 
idea. I think it is much better to have these things 
adjudicated on a case-by-case, fact-specific basis.
    Ms. ADAMS. Thank you, sir. I am out of time. Thank you.
    Chairman HARDY. I will now turn the time over to Mr. Kelly 
for questions for 5 minutes.
    Mr. KELLY. I thank the witnesses for being here, and Mr. 
Farrar and Mr. Larkin, thank you for your service to our 
country. I generally joke with my JAG officers, though. I do 
not know if I count that or not being a lawyer myself, Mr. 
Larkin, but thank you for your service.
    Mr. LARKIN. I have heard that before.
    Mr. KELLY. Small businesses are so critical to this Nation, 
and that is why I love being on this Committee. Mr. Farrar and 
Mr. Patel, I pay attention to you because you have owned small 
businesses, and unless you have owned a small business, you 
cannot from the academia world understand what goes on in a 
small business. But I would venture to say that in your first 
couple of years in small business, can either of you comment to 
whether or not you worked at below or at no minimum wage as an 
owner of a franchise? Either a franchise or a franchisee, can 
you comment on your earning as the actual owner of that 
franchise or franchisee?
    Mr. PATEL. During my first couple years, me and my wife 
were on the property 24 hours. So if you divide up the hours 
and the amount of salary we took in or the profits we took in 
from the business, we were negative below minimum wage. So, 
again, I think many small business owners face the same issue 
in terms of, as far as minimum wage that we really earn, 
especially with the fact that we put a lot of hours behind that 
business, whether it be 24--whatever hours we put out there, 
but it is definitely below what we have there.
    Mr. FARRAR. I was homeless, so yes, sir. At the end of the 
day, if you own a business, that is your passion. You do not 
just say, hey, I am going to start this, and 5 o'clock it is 
over. Owning a small business takes a toll, not only on 
yourself but on your family as well. So I am working 24 hours a 
day.
    Mr. KELLY. They like to talk about the temporary workforce, 
but can you guys, Mr. Patel and Mr. Farrar, I want a short 
answer to this, but can you tell me what your most important 
investment in your company being successful is?
    Mr. PATEL. For us, it is human capital. People.
    Mr. KELLY. People, right?
    Mr. PATEL. I mean, again, a really quick, simply analogy on 
this is today in the hotel business it is becoming a commodity. 
You can go to a Holiday Inn, you can go to the Hampton Inn. A 
room is a room. The breakfast is breakfast. The only way we 
differentiate our properties to the competition is through our 
people. We need the ability to manage our employees at our own 
hotels. That is the only way we can get a competitive advantage 
compared to the next hotel over.
    Mr. KELLY. Mr. Farrar?
    Mr. FARRAR. We have a saying in SoldierFit, whose company? 
It is our company. It is everybody's company. I do not even 
make the most in my company. The truth of the matter is if you 
start a business, you are doing it for passion. You are going 
to take care of the people that help your dream along.
    Mr. KELLY. It goes back to my thing, those people, you make 
sure that they are invested in your company. You are going to 
pay them as well as you can. Sometimes there are sacrifices, 
but it comes down to if they are not committed, temps do not 
give you that same commitment, do they?
    Mr. FARRAR. Negative.
    Mr. KELLY. Okay. And as a franchisee, Mr. Patel, do you 
prefer hiring temps or do you prefer hiring people who have an 
investment in your company who want to see it grow and want to 
grow with you?
    Mr. PATEL. We hire our own people. We actually purchased a 
hotel a couple years ago in Baltimore and the previous owner 
had temp people there. After we took it over we just did our 
own employees. It is just better to manage your own people.
    Mr. FARRAR. On our end, sir, we have over 60 employees. We 
have hired outside of our company nine times. Out of our 
personal trainers, only two were outside the company. Ninety-
eight percent of our trainers started off as members in our 
company, then got their certification, and then became 
trainers.
    Mr. KELLY. Finally, I think there was a comment and I do 
not think that it would apply to you as a franchisee or 
franchisor, but can you tell me if we do this on a case-by-case 
basis, how much money you were going to pay to people like Mr. 
Larkin over there to represent you, and does that make prices 
go up for the consumer, and also make your wages lower because 
you have less money to pay the employees that you currently 
hire because you are defending lawsuits one by one?
    Mr. PATEL. Most small businesses like us, we do not have 
in-house attorneys. We do not have people to do that sort of 
stuff for us. We are busy running our operations. So for us to 
hire somebody outside would be a killer.
    Mr. KELLY. NLRB, I am sure if you make the wrong decision 
based on what you think is right and that you had good 
intentions and you intended to do right, I am sure they do not 
fine you if you had good intentions and you made a mistake that 
was honest and truthful that they did not answer. They do not 
fine you, do they? Absolutely, they fine.
    Mr. Chairman, I yield back.
    Chairman HARDY. The gentleman yields.
    I now turn the time over to Ms. Velazquez, the ranking 
member on the Small Business Committee.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    Mr. Freeman, we have heard that the BFI decision is going 
to significantly impair the franchisor-franchisee business 
model. What do you have to say about the argument that the BFI 
joint employer test will impair this business model?
    Mr. FREEMAN. Well, the core of my response to that would 
present a different frame on what the NLRB has said about 
franchising than is presented by Mr. Larkin. The NLRB has twice 
made statements in the General Counsel's amicus brief and the 
BFI case and in the advice memo in Nutritionality, that is very 
clearly indicated that franchisors are there to protect their 
brand and to protect the product quality. When they are 
exercising direct control over aspects of a franchisee 
enterprise to that end that the Board is not going to pursue 
any kind of joint employer doctrine to hold the franchisor 
responsible at all.
    Now, it is true that these are advice memos, but the 
General Counsel ultimately chooses to prosecute. In 
Nutritionality, the case was dismissed and it never had to go 
to the Board. Now, there may be some cases, certainly not the 
kind of case that I hear from Mr. Patel and Mr. Farrar where 
new levels of technology have created the ability of 
franchisors to exercise tremendous amounts of control in a 
franchise enterprise. The Board has a responsibility, when you 
have new technology changes in the actual industrial landscape 
of our Nation, to take a look at this and engage in a fact-
specific inquiry to see whether there might be a problem. That 
is going on in the McDonald's case right now, and we will see 
what happens. But that certainly seems to be a far cry from the 
situation of many other franchisors. So I am not concerned 
about overreach here. We have plenty of contractors and 
subcontractors that have been unionized, that engage in all 
kinds of business processes that have never been subject to 
joint employment over the history of the Board's operation.
    Ms. VELAZQUEZ. Thank you.
    I think there is universal agreement that union organizing 
is likely to increase following the BFI decision. How is that 
going to impact small business contractors and franchisors?
    Mr. FREEMAN. Well, we have many small business individuals 
that are subcontractors and contractors who have unionized 
workforces. In fact, if you look in the construction industry, 
we have established a very vital middle class for construction 
workers through the unionization of major sections of 
commercial construction. I think it has been a benefit to our 
Nation. It has been a benefit to the contractors who have 
greater workforce stability and a much stronger workforce. I 
think that kind of stability would be a positive thing in a 
place like the fast food franchises where right now you have 
workers who are attempting to make a living in a situation that 
is netting them poverty-level wages and placing a burden upon 
the taxpayer. So in those situations, we may see unionization.
    I also think that we are facing situations in the 
manufacturing food processing center where you have a lot of 
temping, where we could radically improve the situation of the 
workforce and make the business more stable, increase the 
buying power of the workforce to increase business overall in 
the United States, and I think that the BFI standard makes that 
more possible than was the case under the old standard that the 
Board reversed.
    Ms. VELAZQUEZ. Thank you.
    Mr. Farrar, I understand your concern about protecting your 
brand in the franchise agreement. But if a franchisor 
prescribes rules that could violate the NLRA at the franchisee 
level, should the parent company be held accountable?
    Mr. FARRAR. If I understand your question correctly, you 
are asking me should we be able to impose these rules and 
regulations? But again, it goes back to we do not know what the 
rules and regulations are. It has not been spelled out clearly. 
We do not know. So you could very easily come up with something 
and say that we were the ones that we overstepped our bounds, 
and that is what is scary about it. We do not know how best to 
help the franchisee. Literally, that is why they purchased the 
franchise, it is because they wanted some mentorship. We do not 
know when it is going to be considered that we overstepped our 
bounds and now we are directly doing anything with them. So it 
is frightening.
    Ms. VELAZQUEZ. Mr. Freeman, do you care to comment on his 
assertion?
    Mr. FREEMAN. I think that we now have some very clear 
guidance, given the statement in the advice memo and given the 
General Counsel's statements about franchising, that make it 
clear what level of control would have to be exercised by a 
franchisor before there would be even an investigation of joint 
employment that could go to a hearing. We now have cases that 
have been dismissed without hearing; that is without the kind 
of expense of that extensive litigation. So I do not see this 
as a real problem. I think that when you do have a situation of 
extensive joint employer control, all employers in America 
should be held liable to labor standards as they are to all 
other legal standards.
    I would finally say that as someone who has been involved 
in adjudicating labor disputes for a long time, we have many 
aspects of labor law that are situations that involve the 
application of complex standards to any given fact situation.
    Chairman HARDY. Wrap it up as quick as you can. Your time 
is expired.
    Ms. VELAZQUEZ. Thank you.
    Mr. FREEMAN. This is nothing new.
    Ms. VELAZQUEZ. I yield back. Thank you.
    Chairman HARDY. I would like to thank you all for being 
here. I really appreciate it.
    Just one comment that I would like to make. I have spent 40 
years in the construction industry, know it very well, 
understand it very well, watched many studies over the years. 
So with statements like that are made sometimes frustrate a guy 
like me, because the studies are out there that showed that 
these union operators, construction workers, have not 
necessarily benefited the taxpayer. Yes, it has benefited their 
pockets and the administrations of unions over the years. That 
is why unions continued to decline. It is actually proven that 
school projects in Ohio, they actually showed that they had 12 
to 15 percent savings when it was gone out to competitive bid 
versus union mandate-type projects. In Nevada, we have had 
studies that show the $4.7 billion spent on schools, that we 
could have probably done another 25 to 35 percent more schools 
if it had not have gone under the prevailing wage workforce. So 
is that a savings to the taxpayers?
    With that, I would like to give everybody just 2 more 
minutes to wrap up and make a comment. So I am going to start 
with Mr. Larkin first, if you do not mind. It will come from 
the other side. Anything that you missed that you might like to 
bring forward.
    Mr. LARKIN. Sure. A couple of things, specifically, on this 
franchise question, and the guidance that has come down from 
the General Counsel in the Freshii memo, the idea that merely 
protecting your brand and your product quality will not make 
you a joint employer. Well, who is going to make that decision? 
The NLRB. And they have told us that they are going to make 
that decision on a case-by-case basis using a standard that is 
literally unintelligible. My clients ask me, how much control 
do I have to exercise before I can be a joint employer? My 
honest answer to them today is, I do not know. And I do not 
like giving that advice. But that is the advice that I am 
giving right now.
    The problem with the standard is that its application is in 
the eye of the beholder and the fact that there has only been 
one decision, this Browning-Ferris decision and the next big 
joint employer decision may not come for a while, that is not 
the end of the inquiry. The real problem, as you have heard 
today, is the potential chilling effect that this may have on 
the franchise that never opens, on the employees who are never 
hired, because someone, whether it is a franchisor, a 
franchisee, a large general contractor who decides to insource 
a specialty trade rather than outsource it, whatever the case 
may be, it is that business owner who makes the decision not to 
go into business with another business because they do not want 
to be the next guinea pig before the Board. That is the problem 
that I think this standard creates for all of us on the 
employer side, and that is what we are grappling with.
    Chairman HARDY. Thank you.
    Mr. Freeman, 2 minutes.
    Mr. FREEMAN. Thank you, Chairman Hardy.
    I think today we have a situation in the United States 
where we have seen tremendous prosperity that has been achieved 
by franchisors and major corporations. We see small business 
owners squeezed, and we also see it may be hard to run a small 
business today. I certainly appreciate what these gentlemen are 
saying to my left. But it is also hard to be a worker today in 
this economy, especially working in low-wage sectors, and 
franchising is among them. And in areas of manufacturing and 
food processing and logistics where temping is widespread, it 
is hard to be a worker. These workers are not able to make a 
living wage. When you are working full-time and you are still 
forced to go to the government to get benefits, we have a 
social problem of inequality that needs an answer from many 
different parts of our government and our business community. 
One of those answers is giving workers a voice, giving them an 
opportunity to exercise their bargaining power in the labor 
market, to sit down across the table from those individuals who 
are setting the terms and conditions of employment and engaging 
in a conversation to explain what they need to make a living 
and what they need to do their job correctly.
    In that regard, I think that the success of unions in 
raising the wages and living standards of their members, when 
unions were large, extended well beyond the unionized workforce 
and created a higher standard of living for all workers, 
whether they were unionized or not. The shrinkage of union 
representation, particularly in a low-wage economy, is hurting 
all workers, and I think it is also hurting the opportunities 
that small businesses have to grow and to maintain their 
workforces.
    So I have a somewhat different view of the importance of 
the National Labor Relations Act and improving the situation 
and the business climate and the living standards of workers in 
America.
    Chairman HARDY. Thank you for being here.
    Mr. Farrar?
    Mr. FARRAR. This whole morning we have talked about the 
benefit to the employees, and the fact of the matter is small 
business is the largest employer in the United States. When we 
look at what has happened over the past several years, 
franchising has outpaced organic startups continuously. If we 
are going to move forward and make sure that we still have 
stability in the economy, I want to move forward on something a 
little bit stronger than I think. I want to know exactly what 
is the ruling? What is the law? When do I become a joint 
employer? And when I am not? I appreciate you all's time.
    Chairman HARDY. Thank you for being here.
    Mr. Patel?
    Mr. PATEL. Thank you for inviting us today.
    The biggest success factor in our business is people. We 
talk about franchisor or franchisee and, you know, all the 
benefits from franchisors. So when they say, well, they do 
this, they do that, the franchisor can tell me what kind of 
soap I can put in my room. It is a tangible item put in, you 
know, a certain type of soap. It is tangible item to put in X-
kind of sheets. It is a tangible items to put in X-kind of 
doughnuts or for a breakfast item. But when you start dealing 
with people, it is difficult. You have different people in all 
different places all over the world, and so dealing with people 
is very difficult. When the franchisor comes in and has any 
kind of impact on my ability to manage the people, that makes 
it hard for us. I feel like my last point would be to say the 
people is how we want to manage our hotel. That is what makes 
us different, and so we just cannot have any kind of issues or 
legislation that impacts my ability to manage my staff members 
and my hotel.
    Chairman HARDY. Thank you. I would like to thank all the 
witnesses for being here today. I appreciate your attendance 
and hearing your words of wisdom. Today's hearing has really 
highlighted the confusion and I think the challenges that these 
new joint employer standards are creating for a wide variety of 
small businesses. We are going to continue our work here with 
our colleagues and continue this Committee to educate the 
workforce and address these problems.
    I ask unanimous consent for the members to have 5 days to 
submit their statements and the supporting materials for the 
record.
    Any objection?
    Without objection, so ordered. This hearing is now 
adjourned.
    [Whereupon, at 11:35 a.m., the Subcommittee was adjourned.]
                            A P P E N D I X


                    Testimony of Vinay Patel

             President and CEO of Fairbrook Hotels

          Before the House Committee on Small Business

   Subcommittee on Investigations, Oversight and Regulations

 ``Risky Business: Effects of New Joint Employer Standards for 
                         Small Firms''

                         March 17, 2016
                           
                           I. Introduction


    Chairman Hardy, Ranking Member Adams, Congressman Knight 
and Members of the Committee, I would like to thank you for the 
opportunity to testify before you today and to share with you 
my experiences as a small business owner, entrepreneur and job 
creator. I look forward to a constructive discussion about how 
the new joint employer standard created by the National Labor 
Relations Board (NLRB) and the permeations of this new regime 
across various government agencies will dramatically affect my 
business, my employees and our ability to continue to provide 
top service in the hospitality industry.

    My name is Vinay Patel, I am first generation American and 
proud small business owner from Herndon, Virginia. I am 
appearing today not only as a hotelier, but also as volunteer 
board member of the Asian American Hotel Owners Association 
(AAHOA). AAHOA represents more than 15,000 small business 
owners who own over 20,000 properties amounting to nearly 50% 
of all hotels in the United States. Our members employ more 
than 600,000 American workers and account for nearly $10 
billion in payroll annually.

    AAHOA is also a member of the Coalition to Save Local 
Businesses (CSLB), which is a diverse group of locally owned, 
independent small businesses, associations and organizations 
dedicated to protecting all sectors of small business and 
preserving the traditional joint employer legal standard at the 
federal and state levels.

    My story is like that of thousands of first and second 
generation Americans and entrepreneurs from all across the 
country. Over the last three decades, my family and I have 
spent our careers developing a livelihood as hotel owners and 
operators. Our company has enjoyed significant growth recently; 
however, our success is the result of years of sacrifice, hard 
work and relentless dedication to our family and to our 
business.

    I was born in Malawi, Africa, to parents who emigrated 
there from India. Entrepreneurship has always been a calling 
for my family. In Malawi, my father operated a small hardware 
store before political unrest forced us to leave. In 1980, we 
came to Greensboro, North Carolina, and lived with family 
members who were in the hotel business. We learned what we 
could from them and eventually set out to run our own property. 
My family settled in Richmond, Virginia, and we not only owned 
and operated the twenty-seven room Royal Inn Motel, but we also 
lived at the property. Operating any hotel, even a small one, 
is a twenty-four hour-a-day business. At that time, my parents, 
brother and I comprised the entire staff. We served the front 
desk, cleaned rooms, maintained the property, and accounted for 
all of the marketing and financial planning. I learned the most 
important lessons in my life, of hard work, commitment to 
family and community service, during these formative years. 
While most kids played sports, or learned music in high school, 
my brother and I were responsible for running our motel during 
nights and on weekends.

    In 1992, I began college at Virginia Commonwealth 
University, as a commuting student, so I could continue to help 
with the family business while I was pursuing my degree. After 
graduation, we built a second property from the ground up, a 
fifteen room motel on the other side of Richmond, that we also 
called the Royal Inn. By then, I was married, and my wife Tina 
and I were now the sole operators of a new business. For two 
years, we did nothing but run every aspect of the hotel, from 
housekeeping, maintenance, guest services and ultimately 
business planning.

    With this tremendous firsthand experience in the lodging 
business, I decided it was time to take an even greater risk in 
an effort to grow the company and create a better life for my 
family. I began to look for opportunities to expand our 
operations from independent motels, to franchised properties 
that came with the advantages of a national brand. While my 
ambitions were high, so too were the hurdles. I found a parcel 
of land in Stafford, Virginia, and laid plans to build a fifty-
five room hotel, with the idea of raising a franchise flag. 
However, brand after brand turned me down. Most brands will 
only accept franchisees who have demonstrated a successful and 
profitable history in the business. My experiences at the Royal 
Inn were not significant enough for brands to take a chance on 
me. In some cases, brands would not even come out to the 
property to see our plans, so we even created a video proposal 
to show them how we intended to proceed.

    After suffering many demoralizing defeats in my attempt to 
open a franchised hotel, I was fortunate to find the right 
partner. While I was seeking to open a new property, Country 
Inn was seeking to expand on the East Coast. We ultimately came 
to an agreement and I opened the first Country Inn in the 
Commonwealth of Virginia in 1995. Here too, my wife, kids and I 
lived on the property and attended to every aspect of the 
business to save money and to ensure the best customer service. 
My wife was the head of housekeeping, maintenance and 
operations and I was the general manager. Two years later, we 
sold the property and sought additional opportunities to expand 
the business.

    In 1999, we found a larger market and built a Country Inn 
near Dulles International Airport, and the success of these 
businesses has allowed us to grow considerably over the past 
nearly two decades. Our experiences in learning every aspect of 
the business, from the ground up, provided the discipline to 
expand at a reasonable pace and to survive the recession, which 
hit the hospitality industry particularly hard. Now, our 
company, Fairbook Hotels, owns eleven hotels in Maryland and 
Virginia, and we work with several franchise brands including 
Carlson, Hilton, Wyndham and Choice hotels. We are also proud 
to employ over 150 employees from the local communities.

    The single most important aspect of our business is human 
capital. Our associates are what make us great. We care about 
our employees and are committed to helping them realize their 
full potential, knowing that the needs of the company are best 
met by meeting the needs of our people. We feel that the 
dedication to our associates will bring us loyalty from our 
guests, our financial stakeholders and the communities in which 
we live and serve.

    It is for this reason the new standard by which to 
determine employer liability set by the National Labor 
Relations Board and subsequently adopted by additional 
administrative agencies is particularly disturbing. I have 
explained my family's history in the hotel industry in great 
detail in this testimony to illustrate how incredibly difficult 
it is for an entrepreneur and an immigrant to succeed as a 
small businessman. Therefore, I am alarmed by the reckless 
actions of the NLRB to begin this destructive regime and now 
the Department of Labor (DOL) to expand upon it. I have no 
doubt that forging this path to regulate business relationships 
will dismantle the franchise model, foreclose entrepreneurship 
opportunities for small businesses and transform franchisees 
into managers and employees from independent owners and 
operators.

                II. Franchising in the Lodging Industry


    Having owned and operated two unbranded properties to start 
my career, I thoughtfully considered the best opportunities to 
grow my business. Unquestionably, franchising provided the best 
business model to expand our operations and in doing so, we 
have created hundreds of great jobs and invested in the local 
communities our hotels serve.

    Having read the directives by the NLRB and the DOL, I am 
convinced that the bureaucrats who are creating these mandates 
have never run a business and clearly do not understand the 
franchise model. If they had, they would understand it is 
inconceivable to conflate a franchisee with a franchisor, from 
any perspective.

    As a franchisee, I am responsible to pay a licensing fee 
and royalties from the top line. In return, I receive the 
benefits of displaying a nationally recognized sign at my 
property, take advantage of a wide-reaching marketing campaign 
and frontline reservations software to ensure efficiencies in 
running my business and a user-friendly platform for our 
customers to book rooms.

    Most importantly however, I continue to own and operate my 
own small business. I am responsible for taking all of the 
financial and career risks involved with starting, maintaining 
and growing the business. I am responsible to secure financing 
for the endeavor and the capital to furnish the property. 
Ultimately, it is my livelihood that is tied to the success or 
failure of the enterprise, not that of some large corporation.

    Moreover, when choosing how best to grow, I embrace 
competition and will always seek the best deal for my business 
interests. It is for this reason, I am not beholden to working 
exclusively with one brand, or one franchisor. I will review 
the market in which I have interest and study the type of 
properties most likely to succeed. Subsequently, I will reach 
out to the particular franchisor to apply for a license. Once 
we have agreed, we will sign a franchise agreement that 
outlines our mutual obligations.

    As the hotelier, I am solely responsible for the daily 
operations of the business. My interactions and my staff's 
interactions with brand representatives are quite infrequent 
and limited to ensuring the quality standards set for the 
nationally recognized product remain consistent from one 
property to the next. In no way does the brand direct the 
responsibilities or functions of my employees. As their 
employer, it is my responsibility to establish working 
conditions including duties, wages, benefits, promotions, 
discipline and accommodating for workers' needs and personal 
situations.

    I am also proud of my record not only as a successful 
entrepreneur, but also as a successful job creator and 
employer. With every hotel we buy or build, we create good 
American jobs. Not only for those employees who come to work in 
my hotels, but also in many secondary industries like 
architecture, interior design and construction.

    For those employees who come to work in our hotels, we 
value building long term relationships and developing 
successful hospitality professionals. In the lodging industry, 
competition in ubiquitous. In order to set our properties apart 
and to create return customers, we must provide exceptional 
customer service. To accomplish this, we must have associates 
and employees who are passionate about their work and enjoy 
working for our company. We take great pride in compensating 
our workers well and creating an environment in which our 
employees have every opportunity to advance. There are many 
examples at our properties where housekeepers have ascended to 
lead their departments, or desk attendants have become general 
managers. The lodging industry is unique in its position to 
create advancement opportunities and provide a platform for 
workers to develop and enhance their professional skills 
through varied responsibilities.

    The franchise business model is the most effective and 
efficient vehicle for small business ownership within the 
lodging industry and in countless other sectors across the 
country. Changes in this model will undeniably discourage 
entrepreneurship and create considerable uncertainty between 
employers and employees across the industry.

                  III. The New Joint Employer Standard


    Under the previous standard of employer liability that 
existed for more than thirty years, an employer was determined 
by the control he had over the working conditions of his 
employees. This standard was simple, clear and certain. 
Employers and employees came to depend on this understanding to 
concisely define our relationship.

    Under the new standards sought and created by the NLRB, 
franchisors may be subject to liability based on the actions or 
inactions of franchisees. As a business owner, I am extremely 
confident in my ability to run by business; however, as I have 
experienced throughout my career, franchisors are particularly 
risk averse and will not simply accept additional liability. 
Instead, they will likely choose only to work with few, large 
franchisees and foreclose new opportunities for small business 
owners like me, in an effort to mitigate liability from a 
lesser established business partner. They will also have no 
choice but to exert control over the daily operations of my 
businesses under our existing contracts. In doing so, I would 
cease to be an independent small business owner and I would be 
subject to the directives of a faceless corporation--
ultimately, I would become a de facto employee of the corporate 
brand.

    Worse and most threatening to my business however, is the 
recent absurd characterization of employer liability from the 
Department of Labor. In the Wage and Hour Division (WHD) 
Administrator's Interpretation (AI) No. 2016-1, the DOL 
discounts the importance of employer status being defined by 
the direct control over working conditions and instead seeks to 
create a regime based on an ambiguous standard of ``economic 
realities,'' that is fabricated on twisted logic and a mangled 
understanding of reality.

    In the AI, the WHD Administrator directly and unabashedly 
takes aim at the hospitality industry in general and the hotel 
business specifically. In the first footnote, the AI putatively 
determines the existence of joint employer status within the 
hotel businesses simply because employees may wear shirts 
bearing the name of a national brand. As I explained earlier, 
the license agreement I sign with a brand permits me to use a 
brand name as a marketing tool to attract customers to a 
nationally recognized product or program. Ultimately, I employ 
my employees and I am the one who signs the front of their 
paycheck, regardless of what logo is embroidered on an 
employee's shirt. In my experience, there is no circumstance in 
which the national brand dictates the tasks performed by my 
employees--yet the WHD Administrator is keen to grossly 
oversimplify the nature of my business.

    It is critical to understand that, in our company, we have 
a very positive and collaborative working environment. This 
means we compensate our employees well and can accommodate for 
their specific needs. Because of this personal connection, I am 
in a position to understand an employee's individual 
circumstances and provide flexibility in compensation, 
scheduling, responsibilities and opportunities for advancement. 
I fear this flexibility will disappear if franchisors were 
forced to take control over the daily operations and staffing 
decisions became subject to a rigid standardized formula from 
the corporate headquarters.

    The WHD Administrator and AI further denigrate tens of 
thousands of hardworking small business owners by dismissing 
all of the efforts necessary to create a business and develop a 
workforce in designating us as mere ``intermediaries'' between 
employees and another corporate entity. This characterization 
implies hoteliers are already essentially employees of the 
corporate brand. I assure you, the struggles my family have 
endured and challenges we have overcome are those of 
entrepreneurs, business owners and employers--titles we wear 
with pride.

    I also understand that the witch hunt for joint employers 
does not end at the NLRB, or Department of Labor, but rather 
there may be a concerted effort by other federal administrative 
agencies, like the Occupational Safety and Health 
Administration (OSHA) to develop liability for franchisors 
based on health and safety inspections of franchisees. The 
collusion between agencies to impute legal obligations onto 
franchisors will only drive a wedge into our industry and 
create difficulty for me to operate my business.

    Frankly, if these burdensome circumstances existed when I 
entered the business, I likely would have chosen another avenue 
for entrepreneurship. The intrusion by bureaucrats in 
Washington, DC, threatens my ability to own and operate my 
business, to create and maintain good jobs and the stability of 
the franchise business model across the United States.

    For more than thirty years, my family and I have built a 
successful business as entrepreneurs, and over the course of a 
few short months, government officials at the NLRB, DOL and 
OSHA have created a regulatory mechanism to destroy our way of 
life.

                             IV. Conclusion


    Chairman Hardy, Ranking Member Adams and distinguished 
members of the Committee, I thank you for the opportunity to 
speak with you today and for your highlighting this escalating 
attack on entrepreneurs and small business owners.

    The NLRB's new joint employer standard and subsequent cases 
before the Board have and will undoubtedly affect how 
independent business owners and operators interact with our 
employees and business partners. I fear the new standard will 
create conditions of liability unsustainable for franchisors 
and they will ultimately take control over the employment 
decisions and daily operations of franchised businesses.

    In an apparent effort to expedite this process, the DOL and 
other agencies have created a new standard of joint employment 
based on manufactured jargon, artificial business models and 
guidelines that lack any semblance of consistency or certainty. 
These actions undermine the ability for entrepreneurs like me 
to grow our businesses, create sustainable, local jobs and 
invest in our communities.

    I urge this committee to investigate the motivations behind 
this coordinated assault on small business and to pass 
legislation that will reestablish the traditional joint 
employer standard that has allowed my family and me to realize 
the American Dream of small business ownership.

    Thank you.
    Good morning Chairman Hardy, Ranking Member Adams, and 
distinguished members of the Subcommittee. My name is Danny 
Farrar, and I am the CEO and Founder of SOLDIERFIT. It is an 
honor to be in Washington today before you, and I am humbled by 
your invitation to speak on behalf of the hundreds of small 
business owners like myself who are members of the Coalition to 
Save Local Businesses. The CSLB is a diverse group of locally 
owned, independent businesses, associations and organizations 
that is devoted to protecting small businesses by restoring the 
``joint employer'' legal standard based on ``direct control'' 
in federal labor law. I also am a member of the International 
Franchise Association, the world's oldest and largest 
organization representing franchising worldwide. I appreciate 
the opportunity to tell you my story and explain how the issue 
before us today will impact small businesses like mine.

    When the National Labor Relations Board (NLRB) decided to 
change the joint employer liability standard in August 2015, it 
was a scary moment for local business owners like me. For 
decades, the joint employer standard has protected businesses 
like mine from liability for employees over which they do not 
have actual or direct control. That has always made sense. But 
now, in adopting this new ambiguous indirect control standard, 
the NLRB has made employers potentially liable for employees 
they do not employ. This new standard jeopardizes countless 
business partnerships in numerous industries. Any legal 
doctrine that is based on ``indirect'' and even unexercised, 
``reserved'' control, such as this one, is so unclear and 
unpredictable that no one can assure small businesses that 
their operations are not in violation. That's why I, and so 
many small business owners around the country, are so 
concerned. We are being forced to try to grow and operate under 
such great uncertainty because of this new standard.

    So Mr. Chairman, I'm not asking for much today. I'm simply 
asking this Subcommittee and the Congress to protect local 
businesses. Specifically, I'm asking to reinstate the very 
successful joint employer legal standard that the NLRB chose to 
change in its August 2015 decision in Browning-Ferris 
Industries. The simple, one-sentence legislation contained in 
H.R. 3459, the Protecting Local Business Opportunity Act, is 
the solution that can protect small businesses like mine and 
give us certainty that federal agencies are not going to 
threaten our businesses in the future. I urge every member to 
support the bill.

    MY SMALL BUSINESS STORY

    Mr. Chairman, I am a small business owner and an 
entrepreneur. By working extremely hard and expending 
immeasurable time and energy, I founded a successful company 
that has three locations and we are opening a fourth very soon. 
But Mr. Chairman, I also am a franchisor; we recently awarded 
our first two franchises to further grow our concept. And the 
threat of unlimited, unpredictable joint employer liability is 
very scary. It threatens everything my partners and colleagues 
have worked to build in our community.

    So while some people may hear the term ``franchise'' or 
``franchisor'' and think only of major corporations, they can 
also think of me, my small business, and my story, and the 
story of hundreds of thousands of both franchisors and 
franchisees who are small business owners.

    Together with my friend and mentor, Dave Posin, I co-
founded SOLDIERFIT, a fitness company committed to the ideals 
of community, patriotism, and the pursuit of the American 
Dream. In just over 5 years, our company has grown to 3 
corporate locations in Maryland, soon to be 4, and we have 
recently awarded our first 2 franchise locations. I also am the 
founder and president of Platoon22, a non-profit I started to 
combat the depression and dislocation that leads 22 veterans a 
day to take their own lives. I am an eight-year military 
veteran who served in the U.S. Army, including a combat tour in 
Iraq, a former firefighter and EMT, and a certified personal 
trainer with over a decade of experience. As you can see, I've 
held many positions throughout my life. While today I appear 
before you as a successful business leader, my road here was 
long and challenging.

    My story begins when I was 2 years old and my great aunt 
and uncle adopted me. I was different from my adopted family. I 
had a different personality, and so from a very young age, I 
was deemed lazy and worthless. The negative experiences of my 
early childhood would set a tone that plagued me for many years 
afterwards.

    By the time I graduated from high school, where I graduated 
146th out of 147 kids, I had very few options for my future. At 
a time when so many of my peers were beginning their adult 
lives full of hope for the future, I began a different journey, 
one that would be plagued with misery, contempt and trauma.

    I left for boot camp after graduation and, shortly 
thereafter, my adoptive mother died of breast cancer. Six 
months after that, my brother took his own life.

    On September 11, 2001, I took the first Army Team into the 
Pentagon to begin the process of searching for remains. With 
every step I took, my anger grew. I wanted to be deployed to 
avenge that day, but my unit was not eligible. I ended up 
leaving the service.

    I took jobs here and there, with one at a fitness club 
where I met my SOLDIERFIT co-founder, Dave Posin. I ended up 
getting fired while Dave got promoted to General Manager. With 
no job, no income, and horrible credit, I ended up homeless. 
Dave helped me find couches to sleep on so I could survive, so 
to speak.

    With no clear goals for my future, I once again turned to 
the military. One month later, I was in Iraq, where I completed 
more than 700 convoy missions. I've been blown up and shot at 
just about anywhere you can get blown up and shot at in Iraq. 
Prior to heading overseas, I was full of cracks. Coming home, I 
was officially a broken man.

    The only job I could get upon my return was going door-to-
door selling windows. My ``colleagues'' were all in high 
school. Imagine that, returning from Iraq where I led troops in 
combat to a job high school kids did to earn extra spending 
money.

    I wanted desperately to get out of the pit I was in, but I 
was scared to try anything for fear of failure, not realizing 
that every tie I refused to try, my failure was assured. The 
life I dreamed of seemed so far beyond my grasp. I had no 
title, no purpose. I wasn't a manager; I wasn't a graduate; I 
didn't come from money; and I had no family. How on earth could 
someone like me dig myself out of this hole that had become my 
life?

    I ultimately hit rock bottom. I drank, self-medicated, and 
ultimately decided my life was not worth living. Somehow I got 
a second chance. I woke up the morning after I tried to end my 
life in the psyche ward, and for three days, I was surrounded 
by people who convinced me that the only way out was to repair 
my cracks and begin climbing out of the wreckage. With the help 
of mental health professionals and mentors, I began again.

    Today, I lead a company that has been the recipient of the 
small business of the year awards in Germantown, Frederick, and 
the State of Maryland. I have been awarded the ``Top 40 under 
40'' of the very important professionals shaping the future of 
Maryland. I was a top 5 finalist for Men's Health ``Ultimate 
Guy'' contest. I have gone from the kid who barely graduated 
from high school to giving the commencement address at one. I 
have gone from the young adult who was homeless to owning a 
business that is slated to make over $3.2 million this year.

    Through my non-profit, Platoon 22, I am helping brave 
service men and women who have charged into combat on behalf of 
our nation, only to return irreparably scarred--physically, 
mentally, or both.

    The SOLDIERFIT team also is active in the International 
Franchise Association's VetFran program, which provides career 
opportunities to veterans and their families to ensure an 
easier transition back into the civilian economy. Together with 
a network of over 650 franchise brands, VetFran voluntarily 
offers financial discounts, mentorship, and training for 
aspiring veteran franchisees and veterans seeking employment. 
Under this program, over 238,000 veterans and military spouses 
have found employment opportunities, including 6,500 veterans 
who have become franchise business owners since 2011. I am 
humbled to be part of this network and, more importantly, in a 
personal position to help the tens of thousands of service men 
and women returning from overseas deployments, some of whom are 
as lost as I once was.

    SMALL BUSINESS IMPACT

    Mr. Chairman, from the perspective of a small business, it 
appears regulators are attempting a corporate takeover of Main 
Street by changing the definition of a joint employer. If 
Washington regulators make large, primary companies liable for 
the employment and labor actions of third-party vendors, 
suppliers, franchisees or subcontractors over which they have 
no direct control, large companies may be compelled to exercise 
more control over these small businesses to limit their NLRA 
liability. Consequently, local business owners may effectively 
be demoted from entrepreneur to middle manager, as they are 
gradually forced to forfeit operational control of the stores, 
clubs, inns or restaurants they built. Not to mention, the 
enterprise value of thousands of franchises and small 
businesses may decrease because of the decreased operational 
control. Further, large companies may be forced to bring 
services in house rather than hiring a small business to do the 
work. Joint employer means big companies will get bigger, and 
small businesses may run out of business partners and 
ultimately fade away.

    A leading firm that conducts research on franchise 
businesses, FRANdata, released in November 2015 a survey report 
entitled ``FRANdata Key Findings and Survey Results: 2015 
National Labor Relations Board Joint-Employer Ruling.'' 
FRANdata surveyed industry leaders and stakeholders, conducted 
secondary research, and examined franchise company filings to 
assess the potential negative impact of the NLRB ruling on 
franchise businesses and indirectly on the economy.

    Among the most significant findings of the report are:

           An estimated 40,000 franchise businesses, 
        affecting more than 75,000 locations, are at risk of 
        failure because of the joint-employer ruling, which 
        will increase labor and operating costs beyond 
        operating margins.

           As a result of business failures, 
        downsizing, and a decline in the rate of new franchise 
        business formation, more than 600,000 jobs may be lost 
        or not created.

           The equity value of franchise businesses is 
        expected to drop by a third to a half. Rising costs 
        will have a negative multiplier effect on valuations. 
        Potentially, hundreds of thousands of franchise 
        business owners will see the equity they have built in 
        their businesses over years decline as the advantages 
        of the franchise model are stripped away, causing 
        higher operating costs.\1\
---------------------------------------------------------------------------
    \1\ Crews, A. et al. FRANdata Key Findings and Survey Results: 2015 
National Labor Relations Board Joint-Employer Ruling (2015). FRANdata.

    As frightening as those statistics are, the NLRB is not the 
only agency trying to expand joint employer liability over more 
small businesses. On January 20, the Wage and Hour Division 
(WHD) released a 16-page administrative interpretation (AI) on 
joint employment, and it seems to provide an even broader 
interpretation of joint employment under the Fair Labor 
Standards Act than even the NLRB's definition in its Browning-
---------------------------------------------------------------------------
Ferris decision.

    In addition to the joint employer concerns, many local 
business owners are nervous about their future access to 
capital and the implications of joint employer on other 
agencies. The members of this Subcommittee well know that the 
Small Business Administration's loan guarantee program is 
critical to the creation and growth of small businesses, as it 
was to SOLDIERFIT. Our business award came from the SBA, and 
our first franchisee secured his initial loan from SBA as well. 
So I want to emphasize how important it is that the SBA 
implement changes to the loan approval process that streamline 
and facilitate franchise businesses' access to these loans. 
But, any changes to the standards cannot be viewed in a vacuum. 
It is important to consider these changes in light of other 
federal government agencies revisions to the definition of a 
joint employer and the increased scrutiny on franchise 
businesses to ensure there are no unintended consequences that 
would reduce access to capital.

    The worst case would be if the SBA streamlining proposal 
were to be hijacked by the anti-franchise-model forces in other 
agencies. If the SBA regulation meant to accelerate small 
businesses access to capital becomes instead a hammer wielded 
by zealots in other agencies determined to crush the franchise 
model, they would view the destruction as inconvenient but 
necessary collateral damage, but it would be a disaster for 
small business owners.

    Why are our local, small businesses being unfairly targeted 
by numerous federal agencies? Why don't we have a government 
that supports small business, rather than making it 
immeasurably more difficult to create jobs and serve our 
communities? I don't see or experience the so-called ``cracks'' 
in our model that some officials here in Washington claim to be 
trying to repair. From where I sit, small business like mine 
still employ 50-60 percent of the workforce and demonstrate 
immeasurable support for every community in America. We are 
proving that small business will continue to chart the course 
for success in this country. Mr. Chairman, one of the most 
important lessons I can share from my life experiences is this: 
When we refuse to fight, our failure is assured. I've seen what 
can happen when we refuse to stand up and fight for ourselves. 
That's why I'm here today. To fight for my dream and the dreams 
of thousands of small business owners throughout the United 
States who are truly confused about why our government is 
implementing regulations that will assuredly chip away at our 
American Dream. Our Coalition is looking for members of 
Congress to stand up with us.

    CLOSING

    Mr. Chairman, I hope that through my story and the 
testimony of my fellow witnesses, you will gain a deeper 
understanding of the very long roads many of us have walked 
before realizing the dreams we are living today, and the 
reasons why our coalition of Main Street small businesses is 
asking Congress for help.

    The bottom line, Mr. Chairman, is this--no one can assure 
me that my business--or anyone else's business--may not run 
afoul of the NLRB's vague joint employer liability standard 
based on ``indirect'' and even unexercised, ``reserved'' 
control. That's why I and so many small business owners around 
the country are asking for Congress to fight for locally owned 
businesses like mine, and exercise its Article I power to 
provide a check on an overreach by a federal agency like the 
NLRB's joint employer activism.

    Mr. Chairman, thank you for your leadership on this issue, 
and thank you again for allowing me the honor of addressing you 
today. I would be happy to answer any questions you have. God 
bless.
                   HOUSE COMMITTEE ON SMALL BUSINESS


       SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT, AND REGULATIONS


    Hearing: Risky Business: Effects of New Joint Employer 
                   Standards for Small Firms

             Testimony of Professor Harris Freeman

          Western New England University School of Law

                         March 17, 2016

    I would like to thank the Chairman of the subcommittee, 
Congressman Cresent Hardy, ranking member, Congressman Alma 
Adams, and the other members of the subcommittee for this 
opportunity. My testimony will address two points regarding the 
National Labor Relations Board's (NLRB) joint-employer rule 
announced in Browning-Ferris Industries of California \1\ 
(BFI). First, the BFI decision is a proper exercise of the 
Board's statutory authority and its consistent with Supreme 
Court precedent. Second, the Board's return to a more inclusive 
joint-employer standard will do no harm to America's small 
businesses even as it provides a path to meaningful collective 
bargaining for a significant sector of the low-wage work force 
that has been excluded from the protections of federal labor 
law.
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    \1\ 362 NLRB No. 186 (2015).

    The viewpoint I offer today rests on my profound respect 
for the labor rights and procedures embodied in the National 
Labor Relations Act, which I acquired over the course of 
fifteen years teaching labor law and researching the workplace 
rights of contingent workers. My view of the Board's 
modification of its own legal standard is also informed by my 
experience adjudicating labor law disputes during the six-plus 
years I served on the Commonwealth Employment Relations Board 
in Massachusetts. In this capacity, my decision making process 
was often guided by well-regarded NLRB precedent, policy, and 
the Board's sound methods of adapting labor law standards to 
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the evolving realities of the modern workplace.

    The NLRB's Joint Employer Standard in Context

    The NLRB's reexamination of the joint employer doctrine in 
BFI was an appropriate response to the rapid expansion of 
subcontracting and precarious low-wage work. Over the course of 
the 21st century, this trend has irreversibly fissured and 
restructured the American workplace. The extensive 
subcontracting of core business functions now has deep roots in 
low-wage sectors of our economy due to the widespread use of 
temporary staffing services and the expansion of franchising 
relationships.

    I begin my remarks focusing on the `industrial realities' 
of temping and franchising arrangements. It is widely 
recognized that these ubiquitous forms of business organization 
are impacted by the NLRB's BFI ruling. Temping and franchising 
accounted for a disproportionate share of the economic growth 
following the Great Recession of 2008. By 2013, staffing 
services generated $109 billion in sales and 2.8 million temp 
positions--a full 2.0 percent of total jobs. Profits are also 
high; consider that in the first quarter of 2014, True Blue 
(formerly Labor Ready), the largest U.S. staffing agency, 
reported profits of $120 million on gross revenues of $453 
million. Franchising is equally profitable. The ten largest 
fast-food franchises employed over 2.25 million workers and 
earned more than $7.4 billion in 2012. Shareholders earned 
another $7.7 billion in buybacks and dividends. This trend 
should be of particular concern to members of the Congressional 
Small Business Committee because soaring profits and 
substantial job growth in franchising and temporary staffing 
services have advanced hand in glove with poverty-level wages, 
extraordinarily high rates of wage theft and widespread health 
and safety violations in these sectors.

    Widely reported problems associated with low-wage temp work 
have eroded the wages, benefits and conditions of work in 
logistics, manufacturing, recycling and food processing.\2\ 
Compared to direct hires, temp workers experience a wage 
penalty. This is most severe among blue-collar temps who now 
comprise 42 percent of the temporary staffing workforce. For 
example, in metro Chicago, a class of permanent, long-term temp 
workers load and unload goods at the warehouses that service 
WalMart and other big box stores. These perma-temps comprise 
over two-thirds of the 150,000 strong warehouse workforce. 
Their pay averages $9 per hour--$3.48 less than direct hires. 
Almost two-thirds of these workers fall below the federal 
poverty line. A well-documented, national epidemic of wage 
theft by unscrupulous staffing agencies only makes matters 
worse. Further, OSHA complaints and protests by temp workers 
have unearthed major health and safety issues, causing OSHA to 
establish a Temporary Worker Initiative to determine, in part, 
when to hold staffing agencies and client employers jointly 
liable for violations that impact the temporary workforce.
---------------------------------------------------------------------------
    \2\ See, e.g., Michael Grabell, Temp Land: Working in the New 
Economy, PRO PUBLICA, https://www.propublica.org/series/temp-land (last 
visited March 15, 2016)

    The workplace ills associated with franchising is 
exemplified by the challenges facing the 3.8 million workers 
who are employed in the fast-food sector. More than 75 percent 
of them work in franchised outlets and routinely face under-
employment, poverty-inducing earnings and wage theft. 
Households that include a fast-food worker are four times as 
likely to live below the federal poverty level. The social 
costs of these conditions are borne by U.S. taxpayers, who 
shell out about $3.8 billion per year to subsidize public 
benefits received by fast-food workers employed at the top-ten 
fast-food franchises who must supplement poverty-level wages 
---------------------------------------------------------------------------
with assistance from government welfare programs.

    Workers are not the only ones impacted by the systemic 
production of inequality and poverty that is associated with 
many franchising arrangements. Individual franchise owners also 
face high levels of economic uncertainty and like franchise 
workers, they are being squeezed by the big franchisors. The 
non-negotiable terms of franchise agreements dictate extensive 
franchisor control over day-to-day operations while placing 
most of business risk on the franchisee. These agreements 
routinely require franchisees to pay exorbitant fees for the 
right to operate, which not only places a downward pressure on 
wages, but leads to higher failure rates for franchised small 
business owners.\3\
---------------------------------------------------------------------------
    \3\ See Gillian K. Hadfield, Problematic Relations: Franchising and 
the Law of Incomplete Contracts, 42 STAN. L. REV. 927, 933-34 (1990); 
Catherine Rucklehaus, et al., Who's the Boss: Restoring Accountability 
in Outsourced Work (NELP May 2014).

    The BFI Decision is a Return to the Traditional Joint 
---------------------------------------------------------------------------
Employer Test Endorsed by the Supreme Court

    The BFI decision did not radically reinterpret Board 
precedent and it did not resurrect a dormant, outmoded legal 
test. The Board merely returned to the traditional joint 
employment standard endorsed by the U.S. Supreme Court more 
than fifty years ago.\4\ BFI maintains the basic inquiry long 
used to determine whether a putative joint employer ``possesses 
sufficient control over the work of the employees to qualify as 
a `joint employer' with [the actual employer].''\5\ Under the 
BFI decision the Board reaffirmed that a finding joint-
employment is made only when a case-specific factual analysis 
shows that two employers ``share or co-determine'' the 
essential terms and conditions of employment.
---------------------------------------------------------------------------
    \4\ Boire v. Greyhound Corp., 376 U.S. 473 (1964).
    \5\ Id. at 481.

    What the NLRB did do in BFI is close a longstanding 
loophole in the joint employer test. Relying on the joint 
employer test endorsed by the Supreme Court in Boire v. 
Greyhound Corporation \6\ and the influential reasoning of the 
Third Circuit Court of Appeals' decision, NLRB v. Browning-
Ferris Industries of Pennsylvania,\7\ the Board found that 
joint employment rests on a broader approach to the concept of 
control than is found in later Board rulings beginning in 
1984.\8\ Under this broader framework, the Board can once again 
examine the full range of common law agency factors that can 
reveal whether and how an employer actually exercises legal 
control over the essential terms and conditions of employment. 
The Board no longer limits its inquiry to examining whether 
employer controls are exercised ``directly and immediately.'' 
Instead, it will now use the traditional, multifactor common 
law inquiry to determine whether an employer ``affects the 
means or manner of employees' work and terms of employment, 
either directly or through an intermediary.'' \9\
---------------------------------------------------------------------------
    \6\ Boire, 376 U.S. 473.
    \7\ 691 F.2 1117 (3rd Cir. 1982).
    \8\ Browning-Ferris Industries, 362 NLRB No. 186, slip op. at *16-
18.
    \9\ Id., slip op. at *21.

    This Board implemented this approach in the BFI case and 
found that the user employer maintained legal control over the 
240 long-term temps at its recycling facility through a host of 
direct and intermediated factors, all of which decisively 
affected the means and manner of the employees' work and terms 
of employment. The user employer was found to have issued 
``precise directives'' through staffing agency supervisors to 
communicate when a worker should be dismissed, where workers 
should be deployed, and the pace at which the work should be 
completed.\10\
---------------------------------------------------------------------------
    \10\ Id.

    The staffing agreement between BFI and the Leadpoint 
staffing agency was also found to establish BFI's control over 
the workforce. The agreement gave BFI final say over who the 
staffing firm could hire to work at BFI's facility, how much 
the staffing agency could pay the workforce, and the right of 
BFI to override Leadpoint supervisors' directives to the 
workforce.\11\ The Board majority's robust, fact-based inquiry 
into the employment relationship at BFI's facility contrasts 
sharply with the limited factual assessment of the employment 
relationship urged by the two dissenting Board members.\12\
---------------------------------------------------------------------------
    \11\ Browning-Ferris Industries, 362 NLRB No. 186, slip op. at *24
    \12\ Id., slip op. at *25 (Dissent of Members Miscimarra and 
Johnson).

    The BFI decision does not specifically address or apply the 
joint employer test to franchising arrangements. That factual 
determination is currently underway as part of an unfair labor 
practices complaint alleging that McDonalds Corporation, one of 
the nation's largest franchisors, is a joint employer along 
with a number of its franchise outlets.\13\ I am not in a 
position to second-guess the outcome of this fact-intensive 
inquiry.
---------------------------------------------------------------------------
    \13\ McDonald's USA, LLC, a Joint Employer, et al., 02-CA-093893, 
et al.; 363 NLRB No. 92 (New York, NY, January 8, 2016) (consolidating 
13 complaints and 78 charges against McDonald's USA, LLC).

    However, this much is clear: Over the course of the last 
decade, tightly controlled business format franchisee 
arrangements have expanded significantly to ensure that major 
franchisors can maintain uniformity of brand, product and 
operations essential to their business models. These business 
format agreements permit franchisor control over franchisee 
workers' terms and conditions of employment. Franchisor control 
can be exercised through training, operating manuals, and 
regular communications with franchisees.\14\ Franchisors in the 
fast-food industry have also implemented sophisticated 
computer-driven management systems to ensure brand maintenance 
and protection, creating yet another mechanism for franchisor 
control over worker' terms and conditions of employment.
---------------------------------------------------------------------------
    \14\ See Gillian K. Hadfield, Problematic Relations: Franchising 
and the Law of Incomplete Contracts, 42 STAN. L. REV. 927, 933-34 
(1990).

    These systems and the terms of franchise agreements, often 
enforced through unannounced, on-site visits by franchisor 
representatives, allow franchisors to control the number of 
workers required to do the job, the manner and speed of the 
performance of every work task, the equipment and supplies used 
on the job, the manner in which equipment is used, as well as 
employee grooming and uniform standards. Every one of these 
control mechanisms dictated by the franchisor may affect the 
---------------------------------------------------------------------------
essential terms and conditions of employment.

    The NLRB's BFI Decision Presents a Workable Joint 
Employment Test That Does Not Create Uncertainty for Small 
Business

    In the context of the economic realities of twenty-first 
century subcontracting that I have outlined, the BFI joint 
employer standard does not present an unworkable test and it 
should not be a source of legal uncertainty or anxiety for the 
small business community. The BFI ruling and other advice 
provided by the NLRB provide ample, clear guidance for small 
business owners, their human resource officers and legal 
counsel. In fact, as recently as April of last year, the NLRB's 
Office of the General Counsel issued a detailed ten-page advice 
memorandum that applied the BFI joint employer test in case 
involving a major fast-food franchisor in Chicago.\15\
---------------------------------------------------------------------------
    \15\ Advice Memorandum from Barry J. Kearney, Assoc. Gen Counsel, 
Div. of Advice, Office of the Gen. Counsel NLRB to Peter Sung Ohr, Reg. 
Dir., Region 13 (April 28, 2015), https://www.nlrb.gov/cases-decisions/
advice-memos.

    The General Counsel's advice memorandum explained that the 
franchisor, Nutritionality, Inc., did exercise extensive 
control over its franchisee's operations to ensure standardized 
products and customer experience. However, the General Counsel 
found that the controls Nutritionality exercised through its 
franchise agreement and directives it issued related to the 
image that the franchisor wished to convey and did not extend 
to any control over the terms and conditions of the employees 
at the franchisee's restaurant.\16\ The memorandum concluded 
that the franchisor, Nutritionality, Inc. was not a joint-
employer and therefore not liable for unfair labor practices 
allegedly committed by its affiliate. The NLRB's advice 
memorandum makes it clear that the Board's joint employment 
test does not predetermine the outcome of any fact-intensive, 
case-by-case inquiry into joint employment.
---------------------------------------------------------------------------
    \16\ Id.

    It should also be noted that the BFI joint employer 
standard has not in any way altered the status of small 
business owners that operate a sizeable portion of franchises. 
These franchisee owners have the same employer status under the 
BFI joint employer standard as they did under the Board's 
previous test. What has changed is that the burden of 
responsibility for the terms and conditions of franchise 
employees can be equally shouldered by franchisors when they 
are deemed joint employers. A finding joint employer status in 
a franchising arrangement might actually prove beneficial to 
franchisee owners. Joint employment would bring the franchisor 
to the bargaining table along with the franchisee. This would 
place the soaring profits being made at the top of the 
franchise chain on the table as a source of wage hikes for the 
underpaid franchise workforce. This could very well provide 
relief for beleaguered franchise owners whose small business is 
forced to operate with costly levels of workforce turnover \17\ 
and under razor thin margins imposed by the franchisor business 
model.
---------------------------------------------------------------------------
    \17\ High turnover rates hurt low-wage companies in general, 
costing employers $4,700 each time a worker leaves and is replaced in 
the high-turnover sector. Robert Pollin & Jeannette Wicks-Lim, A 
Fifteen Dollar Minimum Wage: How Fast Food Industry Could Adjust 
Without Shedding Jobs, Political Economy Research Institute Working 
Paper, No. 373 (Jan. 2015), http://www.peri.umass.edu/fileadmin/pdf/
working--papers/working--papers--351-
400/WP373.pdf.

    With regard to temping: the BFI decision does not present 
any uncertainty for large or small employers that use a 
temporary staffing agency workforce to perform the essential 
work of their business. In these situations, the NLRB has made 
it clear that that a user employer who contracts with a 
temporary staffing agency is potentially a joint employer of 
the temp workers that are deployed to the user firm's place of 
work. The potential for a finding of joint employment is built 
into the structure of temporary staffing arrangements and 
contractual agreements. Unlike franchising, the temporary 
staffing industry business model is based on codetermination of 
the terms and conditions of employment. Typically, the user 
firm contracts with the staffing agency and retains extensive 
direct and indirect control over the means and manner by which 
the work is carried out in its own facility. The temporary 
staffing agency earns a substantial profit for handling all 
payroll issues, providing worker's compensation insurance and 
coordinating the hiring of the workforce. BFI makes it clear 
that even when the temporary staffing agency deploys 
supervisors to the user employer's worksite along with the temp 
workers, the staffing agency supervisors are obliged to follow 
the directives issued by the user firm's managerial and 
supervisory staff.\18\
---------------------------------------------------------------------------
    \18\ Browning-Ferris Industries, 362 NLRB No. 186, slip op. at *22-
24; See also Harris Freeman & George Gonos, Taming the Employment 
Sharks: the Case for Regulating Profit-Driven Labor Market 
Intermediaries in High Velocity Labor Markets, 13 Empl. Rts. & Employ. 
Pol'y J. 285 (2009).

    Over the last few years, we have witnessed large numbers of 
under-employed, low-wage temporary workers and franchised fast-
food workers demand their fundamental labor rights. The NLRB's 
joint employment test now allows for these workers to enter 
into meaningful collective bargaining relationships in 
workplaces where temporary staffing arrangements and 
franchising result in two employers sharing or codetermining 
the conditions of work. It would be virtually impossible for 
the temporary workforce at BFI to meaningfully bargain over a 
wage increase or to discuss a safety issue when BFI is not at 
the bargaining table to address these mandatory subjects of 
bargaining. Similarly, there can be no meaningful collective 
bargaining when a franchisor exercises palpable, albeit 
indirect control, over workplace conditions that are at the 
core of the obligation to engage in good faith bargaining if 
that employer is not legally obligated to sit at the bargaining 
---------------------------------------------------------------------------
table with workers that choose to unionize.

    Conclusion

    Given the NLRB's obligation to apply labor law to changing 
economic realities,\19\ the Board acted well within the 
authority granted to it by Congress when it revised its joint 
employer standard in BFI. Nothing in the statutory text of the 
NLRA or in well-reasoned precedent prevents the Board from 
returning to the traditional joint employer test that 
predominated until 1980, when a rigid and narrower conception 
of joint-employment gained sway in Board proceedings. It is my 
view that the Board's revival of the traditional, joint-
employer standard is necessary to achieve both the flexibility 
employers seek and the fair treatment and decent wages that 
temps and franchise workers demand and deserve. Absent the 
NLRB's revised joint employment test, our nation runs the risk 
of labor law becoming irrelevant in the much of the low-wage 
economy, where collective bargaining is sorely needed to 
address the extreme levels of inequality and exploitation 
currently experienced by millions of American workers.
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    \19\ See NLRB v. Weingarten, 420 U.S. 251, 266 (1975).

    Thank you for considering my comments.
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 
    
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