Franchise Outlook

Senate Hearing on Franchise Industry

Last week,  the Senate Health, Education, Labor, and Pensions (HELP) Committee held a hearing on the changes facing the franchise industry following the National Labor Relations Board’s decision that franchisors and franchisees can be “joint employers.”

The “joint employer” idea says that the corporate office shares responsibility for employee working conditions with the individual franchise location. Those in favor of the idea say that franchise locations shouldn’t operate under the rules that apply to small businesses, because they have the support of large corporations. Those opposed to the idea point out that franchisees are small business owners, with personal responsibility for hiring, paying, and managing workers.

Right now, this is a legal dispute centered on McDonald’s restaurants. The NLRB took a position, but the legal wrangling is not likely to end soon.

While the court battle is underway, there has been plenty of discussion of this issue. The Senate hearings haven’t ended that discussion. Some are saying that the final outcome of the dispute could change the nature of franchising, and of the relationship between franchisor and franchisee.

There are clearly two sides to the argument, and that was reflected in the Senate hearing. The committee chair, Lamar Alexander, said that this new definition of the franchisee-franchisor relationship “could destroy a small business opportunity for more than 700,000 Americans” if it became law.

Franchisees testified at the hearing, saying that the influence of the “joint employer” idea could reduce their freedom to run their businesses as they choose, under the terms of the franchise agreements they signed. If this is the case, then the proposed policy changes could attack basic freedoms for franchisees.

It has also been suggested that the additional costs for franchisors, if they are required to take responsibility for day to day operations for each of their franchisees, would be crippling. Franchisors might determine that it would be in their best interests to own all their locations, and the franchise system, which has been so successful, could be threatened.

On the other hand, supporters of the policy changes say that franchisees are currently accepting all the liabilities and responsibilities for their employees’ working conditions, even though the franchisor has a great deal of power over their ability to provide positive working conditions for those workers.

The controversy has also become entangled with discussions about minimum wage, changes in the employment landscape which see more people working as contract labor rather than employees, and other economic changes on the horizon.

However, no matter what political and economic issues come to mind, the central question revolves around the definition of an employer. The proposed new “joint employer” definition makes employers of people who have no direct relationship at all with the employees.

Some of the responsibilities currently involved in identifying “joint employers” include these:

  • recruiting
  • interviewing
  • hiring
  • training
  • choosing and supplying uniforms
  • setting wages
  • scheduling working hours
  • direct supervision of work
  • record-keeping
  • promoting and firing of workers

Franchisors do not typically take on these responsibilities, though they may have some influence in some areas.

Alexander went on, “We live at a time when Democrats and Republicans bemoan the fact that it’s getting harder and harder to climb the economic ladder of success in our country. Successfully operating a franchise business is today one of the most important ways to do that.”

Watch the hearing.

Pending Request