Food Fight and the Franchise System

In the heat of the summer, a food fight erupted into a whole new realm. The National Relations Labor Board (NLRB) ruled that McDonald’s can be held liable for the employment decisions made in its franchised restaurants. If put into effect, the ruling would essentially redefine the franchisor as co-employer in collusion with its franchisees.

Unlike most battles, this one is divided into three parts. Some unions and workers believe the ruling is fair and should be law. Some franchisors, franchisees and even some federal lawmakers believe that, if enacted, this rule could change the entire franchise system. And, some in the franchise world believe this ruling will create no negative consequences on the franchise model at all.

Who’s right? It depends on who you ask, but in this tale of three outcomes, there are immense considerations.

The Current Agreement

Ray Kroc, the founder of McDonald’s once said about franchising: “Franchisees are in business for themselves, but not by themselves.” Under current rules/ guidelines, franchisees are independent business owners who are a part of a franchise system. They hire, fire, set the wages, and set rules for their personnel in their locations. The franchisor does not engage in any of these activities.

The extent of the franchisor’s control is to make sure that the quality of the product, whether it is hamburgers, or clothing, etc., as well as the branding is uniform. This has been the franchise model for more than 70 years.

Franchisors do not pay the wages of its franchisees’ employees, nor do they hire them, or dictate their benefits.

The Potential Changes

If enacted, the NLRB’s July ruling would not simply mean a change in title. By assigning the franchisor as a co-owner, it could mean franchisors will have to take at least part responsibility for daily operations.

Whether or not the franchisee becomes similar to any other employee is a possibility but not necessarily the rule. And the local owner (franchisee) would see his or her wages set via a union contract negotiated by corporate executives.

This approach also would create larger groups of employees that are attractive to the recruitment goals of labor unions. Finally, it could force corporations to drastically alter operations. The simple reason being, it invites new liability, which could invite new lawsuits if not tightly controlled.

Picking Sides

As mentioned, unions and many fast food employees are in favor of the ruling. The fight for $15 wages and the right to unionize has galvanized groups throughout this entire year. The NLRB’s ruling is considered by many people a first step in the fight to reach that destination. Some in the franchise world believe this ruling would obliterate the franchise model, and thus change the future of franchising for all industries not just fast food.

A couple of federal lawmakers must agree, as they are investigating the ruling. However, there are some in the franchise industry who argue this is very unlikely to have any effects on the franchise model at all.

Why? Well, even if the NLRB ruling is upheld, there are still numerous legal hurdles for it to clear before becoming law. It would require revisions to the National Labor Relations act, The Lanham Act, and The Franchise Rule of the FTC, just to name a few.

Next Steps

Clearly, we have not heard the end of this story by any stretch of the imagination. McDonald’s is vowing to fight the NLRB’s decision, taking an appeal to the U.S. Supreme Court if it has to. As for investigating lawmakers, this could be something that ends up being debated on the floor of the Capitol, but as of this moment, that has not happened. Fast food employees have already shown their resolve. The strike that happened in July and September’s protest were not the first, and probably won’t be the last.

It is conceivable that there will not be a definitive outcome on this for many years. One thing is certain, there is a process in motion but it’s not time to panic yet. Whether you are for or against potential changes, this presents a fresh look at franchise system standards. However, the balance of competing interests is nothing new in franchising.

As a lawyer who represents franchisors, I would advise them to take a fresh look at their procedures and operations manuals. It would allow them to prepare for possible changes down the road. It might even allow them to see changes that could benefit the company now.

Because when all is said and done, corporate executives, business owners and employees all need one another.
Franchising is an industry that depends on a team concept. The franchise system creates jobs, and is a valuable part of the business economy. With the current state of the U.S. economy, who’s not lovin’ that?

Harold L. Kestenbaum is the owner of HLK, P.C., a law firm specializing in franchise law and other matters relating to franchising. With more than 35 years’ experience, Kestenbaum currently is or has advised many regional, national, and international franchise companies in many industries.

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