I understand that the title of this article is somewhat dramatic and I agree that it is – but I am also concerned. The concern that I have is not as an advocate for the franchise business model but as an advocate for entrepreneurship and the impact that this decision may have on small businesses throughout the country.
Consider the thousands upon thousands of small business owners who buy a franchise. These small business owners:
- Invest and risk their savings to create a business for their families;
- Are motivated to do more and work for themselves;
- Want to build a lasting asset that serves their families, communities, and employs people in the process.
So, for example, a soon to be entrepreneur and business owner signs a franchise agreement and starts his or her own business
The advantage of buying a franchise is a recognized brand and systems for operation, but the risk of failure and benefits of success still rest with this franchisee business owner.
The efficiencies of franchising made this happen, that is, this franchisee entrepreneur is risking his or her own savings and starting a business that he or she will operate, but the franchisee does so with a license to the franchisor’s brand and system.
What Is The NLRB?
The National Labor Relations Board is a federal agency governed by a board of five members and a general counsel. This board is appointed by the President of the United States and, generally, is comprised of a political configuration that typically reflects the affiliation and beliefs of the President of the United States. The NLRB is a quasi-judicial entity and possesses the jurisdiction to investigate and adjudicate cases involving the unions and unfair labor practices.
So, What Happened at The NLRB? What is the Big Deal
In 2014, there were various protests and fast food worker campaigns protesting their wages, many of these protests involved McDonald’s employees. A proceeding was commenced and investigation initiated by the NLRB into McDonald’s response to the protests and whether or not McDonald’s, in its response, engaged in unfair labor practices.
So far, what I have described is not a big deal, but what comes next can have a significant impact and overturn the franchise industry as we know it. You see, rather than just proceeding against the McDonald’s franchisee owners (the owners of the McDonald’s locations where these alleged unfair labor practices occurred), the NLRB has also proceeded against McDonald’s corporate and has held McDonald’s corporate to be a joint employer. This past December, the NLRB issued its joint complaints and the hearings are scheduled for March, 2015.
Franchising as we Knew It: Not A Joint Employer?
- Franchising is a contractual relationship defined by a franchise agreement;
- A franchisee obtains the license and right to utilize a franchisor’s brand and system;
- The franchisee – after it signs a franchise agreement – uses his or her own capital to establish the franchise location that he or she directly manages;
- The franchisee owns the franchised business and one of the assets that he or she possesses are the rights granted into the franchise agreement;
- The franchisee hires and pays employees and determines who he or she hires, who to promote, and who to give raises to;
- The franchisee is the known employer as to both state and federal employment taxes; and
- The franchisee was the employer and the franchisor, well, the franchisor was the franchisor and certainly not an employer.
What did the NLRB Decide?
Well, this board decided that not only was the McDonald’s franchisee an employer, but that McDonald’s corporate was also an employer – a joint employer. That is, the franchise company is responsible and liable for the employment decisions of its franchisees. Specifically, counsel for the NLRB stated, in part:
Our investigation found that McDonald’s, USA, LLC [the franchisor], through its franchise relationship and its use of tools, resources, and technology, engages in sufficient control over its franchisee’s operations, beyond protection of the brand, to make it a putative joint employer with its franchisees, sharing liability for violations of our Act…
Why Is This a Devastating Blow?
Well, for starters, it undermines and unsettles the entire foundation of the franchising business model. It creates uncertainty and potentially negates thousands upon thousands of existing franchise agreements that are relied upon by business owners throughout the country.
The worst part is that, although it may benefit unionization efforts, it undermines job creation and undermines the ability of small business owners to start their own franchised business. Consider that this decision will require franchisors to potentially take a defensive position and take over and exert control over a franchisee’s employee decisions and management. This will increase costs as the franchisor will be required to micromanage the franchisee’s operations (operations that are more efficiently managed at the local franchisee level) and this increased cost will reduce the franchisee’s profits, make the franchised business less competitive (because the franchisee’s franchised business will be subjected to national employment and union claims, unlike independent businesses) and, overall, place the franchisee owner at a competitive disadvantage.
Ironically the NLRB decision could undermine franchisee rights and, eventually, relegate franchisees into glorified employees that risk their own capital to just buy themselves a job.
Sure this decision benefits unions, i.e., they now have deeper pockets to go after (in this case, corporate McDonald’s) but the small business owner/the franchisee will be relegated to the sidelines and eventually pushed out of entrepreneurship.
It’s a tough situation where it seems that politics and political decisions strengthen big unions and big business and in the middle is the small business owner and entrepreneur who just so happen to be the job creator.
End of the free world…? I don’t think so, but damaging nevertheless.
In March Charles participated in an IFPG Educational call called “2015 Legal Outlook for Franchisors: The NLRB Joint Employer Decision and How It Affects You.” Please submit the order form below to request a free copy of the CD by mail.