Which markets are likely to see lawsuits now that franchisors may be on the hook for the actions of their franchisees?
While franchise trends have traditionally tended to trail behind other business sectors in terms of embracing new ideas and concepts, the tide seems to be turning. In the past few years, more franchises—both those that are long established as well as new players—have been more proactive about pushing into fresh niches of the industry in order to stay ahead of their competition and attract the attention of their customers.
And it seems to be working. According to Scott Shane of Case Western Reserve University, small business failure rates have been in long term decline over the last several decades, totaling a 30 percent decline since 1977. These rates fluctuate with business cycles and are affected by factors like less competition, better managers, improved technology and more.
But one major development last year that could have an impact on that decreasing failure rate is the ruling by the National Labor Relations Board that increased employer accountability for wages and work conditions — a ruling that has the potential to drastically change the face of franchise business in the U.S.
The first test of the NLRB decision was scheduled to come in early January as the Service Employees International Union’s labor complaints filed against McDonald’s were to be heard in court.
Sins of the father
In December, the National Labor Relations Board named McDonald’s Corp and some of its franchisees in complaints that accused the franchisees of labor violations. The filed complaints claimed McDonald’s workers had been “fired or intimidated for participating in union organizing and in a national protest movement calling for higher wages.”
According to analysts, franchisors like McDonald’s have historically been protected from such lawsuits based on the NLRB’s previous interpretation of the “joint employer” relationship.
But that case was postponed when Administrative Law Judge Lauren Esposito canceled the start date for the trial without setting a new one. Esposito cited problems with “courtroom technology to present evidence and allow parties to participate remotely” as the reason for her decision, according to a Reuters update on Jan. 11.
There is no scheduled date for the trial to begin, but according to analysts, if the SEIU wins, “the plan is to use the threat of future labor cases to force the global economy to recognize a union of cooks and cashiers—still an unlikely prospect to be sure, but one with potentially massive implications if successful.”
McDonald’s is the big fish in the quick service restaurant pond, to be sure, so as the year goes on, it’s unlikely that we’ll see similar legal challenges lobbed at peers of McDonald’s Corp. And as far as other industries, such as retail or service franchises, wage and overtime issues are not as common as in the food industry, so it’s fairly unlikely we’ll see lawsuits there either. Ultimately, if there were going to be more lawsuits, they probably would have surfaced by now.
But lawmakers might make it a moot point.
A legislative solution?
During the final months of 2015, GOP lawmakers attempted to stop the new NLRB “joint employer” standard by introducing new legislation. They weren’t successful, but we may see the campaign renewed in 2016, and possibly with bipartisan support.
A spokesman for Nebraska Democrat Rep. Brad Ashford told the Huffington Post in December that Ashford had been speaking with a significant number of democrats who would be open to legislation blocking the standard. The White House has indicated that President Obama would oppose such legislation, with White House Press Secretary Josh Earnest telling Huffington Post that the joint employer issue was the “best example of Republicans’ misplaced priorities.”
But that doesn’t mean the specter of litigation won’t make other companies think twice.
On-demand services open possibilities and uncertainty
Based on the long-successful model of pizza delivery—with a twist—more franchises are poised to follow in the successful footsteps of on-demand services like Jimmy John’s. Unlike pizza delivery, though, building the infrastructure necessary to make delivery an option involves an outlay of resources that is not cost effective for most franchises – and that applies not just to food, but home services, retail same-day delivery, beauty/health services and more. Turning to third-party delivery services like Uber, GrubHub and Postmates seems like it could be the missing link in allowing franchisors to push into this burgeoning niche.
But could unforeseen legal issues tangle this concept in its infancy? Potential lawsuits like those targeting McDonald’s and their franchisees could give Uber and others second thoughts about working with franchises.
Without a doubt, franchisors and franchisees alike will be watching the McDonald’s trial with great interest, as it could set the tone for franchise discussion in 2016 and beyond. Legislation and further developments in the on-demand market could make the new joint employer standard even more complicated.
Harold L. Kestenbaum is an attorney specializing in franchise law, engaged exclusively in the practice of franchise distribution and licensing law since 1977. He is the owner of HLK, P.C and has served on numerous boards and committees over the past two decades. Kestenbaum represents franchisors on a regional, national and international level from existing franchise systems to first-time franchisors. He is the author of So You Want to Franchise Your Business, the first book dedicated to franchise entrepreneurs.