August 1 2014
The Feds Attack the Franchise Business
We have already blogged on the recent decision by the general counsel at the National Labor Relations Board (NLRB) that would virtually rewrite the way franchises operate in the U.S.
The NLRB general counsel claims that franchisers are joint employers with their franchisees, which has never been the case. This drastic redifinition would make franchisors responsible for the hiring and firing at locations far from headquarters. Franchisers under the current arrangements take a one-time fee and royalties from the franchises and let them operate on their own.
The NLRB decision is nothing short of an “attack on the franchising business model.” It could destroy a sector of the economy that has created jobs and wealth.
Andrew Puzder, CEO of CKE Restaurants, which licenses Carl Jr.’s and Hardee’s, explains in today’s Wall Street Journal just how far-reaching this is:
In a decision with potentially devastating economic effects, the National Labor Relations Board's general counsel this week ruled that McDonald's Corp. could be treated, in labor complaints, as a joint employer of its franchisees' workers. This determination directly threatens the franchise business model that has encouraged countless American small business owners, creating jobs and broad-based economic growth.
When you have picked yourself up from the floor after realizing that one lawyer for an unelected board can have such power, I urge you to read all of Mr. Pudzer’s piece. It explains why this decision has the potential to take down an important sector of the economy. For starters, franchisers simply aren’t equipped to manage the hiring and firing at their local franchises:
The franchise agreement generally has a 20-year term. Current agreements were negotiated while relying on the NLRB's existing joint-employer standard. At CKE Restaurants, even if we wanted to manage our franchisees' employees, we lack the contractual authority to do so for the simple reason that neither party contemplated that we would manage them.
Assuming that franchisers could somehow overcome these significant contractual impediments, what would the effect of the new NLRB ruling be if it becomes the standard? It would essentially destroy the business model.
Imagine the upheaval in the fast-food industry if tens of thousands of restaurants accustomed to operating independently suddenly were forced to work hand in hand with franchisers on every employment-related decision.
Franchisers would have to review countless job applications at restaurants across the country, while consulting on compensation structures and bonus plans at individual restaurants….
Some franchisers would be tempted to act with utter disregard for profitability in hiring and firing at far flung outlets because their royalties are paid on the basis of top-line sales. It would be a mess because it would upend all the rules regarding franchises:
Franchisers and their franchisees are not joint employers, and the NLRB is defying reality by pretending otherwise. Many budding entrepreneurs got their start as franchisees, and millions of young Americans have gained their first work experience in franchise restaurants. The Obama administration does not have a stellar record for encouraging business growth or economic vitality. Killing a business model that has been such an American success would be one of the administration's most misguided moves.
But it is so much easier for activist groups on the left to go after one large operation that a lot of franchisees scattered around the country. I suspect that played a large part in the general counsel’s decision.