Buying a Franchise

Does the NLRB Ruling Mean the End of Franchises?

The Wall Street Journal reports that the National Labor Relations Board has determined that McDonald’s — and presumably other franchisors — can be considered “joint employers” with their franchisees.

This has implications for franchisors:

  • Franchisors may now be held liable for the actions of their franchisees, even if the franchisees have broken franchise rules.
  • Employees of franchises may now be able to unionize as a single large group and go after the franchisor, rather than dealing with franchisees on a small business basis.

There may also be implications for franchisees:

  • Franchisees may no longer be treated as small businesses under the law — for example, minimum wage requirements that might exempt small businesses may not apply to franchises.
  • Franchisees may be under stricter control by franchisors, since the franchisor will now bear more responsibility.

Andrew Puzder, CEO of CKE Restaurants, wrote (also in the Wall Street Journal) that “The franchiser/franchisee relationship is built on a division of roles and responsibilities. The franchiser owns a unique system, which it licenses and protects as a brand. The franchisee operates an independent business under the brand’s trademarks at one or more locations as a licensee.” He pointed out that it is the franchisee who benefits from efficient and profitable management of the franchise, not the franchisor. It is therefore the franchisee who is most motivated to control labor costs, and not the franchisor.

Puzder also points out that franchisors can’t realistically be responsible for day to day operations such as hiring, assignment of duties, or making sure employees receive breaks and overtime compensation.

What’s more, franchisors don’t have the legal authority to do any of these things. Franchise contracts drawn up before this ruling don’t normally give franchisors the right to manage workers.

Some observers, including Puzder as well as Stephen Caldeira, president and CEO of International Franchise Association, believe that the NLRB ruling could spell the end of the franchise business model. Is this practical?

Look around you next time you pass through the business district of nearly any American town. You’ll see franchises all around you. Franchise businesses make up some 15% of all businesses, according to expert estimates; in 2010, the U.S. Census found that 59% of restaurants were franchises, and the percentage has probably grown since then. One in eight private-sector jobs in the U.S. is at a franchise. Franchises make up much of the roster of businesses Americans rely on every day, from UPS to retail stores, auto mechanics to business and personal services, and certainly restaurants. Franchises are an integral part of the economy.

The U.S. can’t do without franchises. This may mean that the NLRB ruling can’t stand. But it may also mean that some sort of compromise must be reached. In many ways, the NLRB ruling is unrealistic; franchisors simply don’t have the kind of authority they would need to have in order to serve as joint employers in a meaningful sense. The case relies on details like the fact that McDonald’s has software that helps franchisees monitor ratio of labor costs to sales, an ordinary business metric used by many businesses.

The foundation of the case may therefore not be a real-world relationship between franchisors and franchisees, but ongoing concerns about the quality of jobs in fast food restaurants. If the case increases awareness about these concerns, it may have done what the claimants wanted it to do, even if the ruling is not upheld.

Pending Request