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Two Years Ago, This Ruling Rocked Franchising To Its Core. Now Everything May Change Again.

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Two Years Ago, This Ruling Rocked Franchising To Its Core. Now Everything May Change Again.

Small-business advocates defend the franchise system outside the National Labor Relations Board office in Tampa, Fla.

Image credit: Tampa Bay Times/ZUMA wire
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This story appears in the January 2017 issue of Entrepreneur. Subscribe »

In 2014, all hell broke loose in the franchising world. The National Labor Relations Board (NLRB) has a group called the Division of Advice, whose job is to suggest what actions the NLRB should take -- and it had recommended that McDonald’s be considered a co-employer of its franchisees’ workers, when it came to violations of federal labor laws. In other words: The McDonald’s corporation would be at least partially responsible for its franchisees’ employees. At the time, no one was sure whether the NLRB, which monitors labor disputes in the U.S., would adopt or ignore the opinion. So as notices and commentaries filled the pages of business publications, the franchise world kept a watchful eye on the situation, and continued grilling burgers and changing oil. 

But then, in December of that year, the NLRB filed 86 charges against a McDonald’s franchisee for unfair-labor practices and named McDonald’s corporation as a joint employer with joint liability. 

With that: panic

From an outside perspective, the ruling wasn’t exactly front-page news. It’s wonky, complicated and seems to be just about McDonald’s. But the “joint-employer ruling,” as it has come to be known, became one of the biggest events in franchising in decades. There was a flurry of press releases, condemnations and lawsuits. Some declared that the move was an existential threat to the entire concept of franchising. Steve Caldeira, then the president of the 1,400-member International Franchise Association, said the ruling would destroy “the fundamental tenets of the franchise model” and “would eviscerate the most successful business model in existence.” It felt like franchise Armageddon. 

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More than two years later, franchising is still standing, but the situation remains a hot, sizzling mess served up on a sesame seed bun. Out of fear, some franchisors have changed the way they work with their franchisees. Others are openly questioning whether the industry is right for them anymore. 

And yet, there’s now the potential for all of this to swiftly come to an end -- and soon. Andy Puzder, Donald Trump’s pick for Labor Secretary, who’s been the CEO of CKE Restaurants (which owns Hardee’s and Carl’s Jr.), has called joint employer a “lose-lose scenario” with “potentially devastating economic effects.” In fact, Trump recently had a related run-in of his own. Last August, a federal judge ruled that his Doral National Golf Resort was liable as a joint employer. In that case, catering workers weren’t paid by the staffing agency that hired them to work at a 10-day event at the resort. Trump Miami Resort Management agreed to settle the case by paying $125,000.

All of which is to say: Joint employer is likely on their radar.

To understand why the ruling has been a big deal in franchising, you need to understand how franchises are structured. So here’s some Franchising 101: While it may seem like the guy taking your McMuffin order -- let’s call him Ronald -- is an employee of McDonald’s (he does have the hat, the shirt and the headset), he’s actually an employee of a separate company owned by a McDonald’s franchisee, Joe Schmo, Inc. If Ronald works extra hours without getting paid, gets fired for union activity or is subject to what are considered other unfair labor practices, he can bring a case against Joe Schmo, Inc., his direct employer. But until 2014, he couldn’t bring a case against McDonald’s itself because, as we know, he doesn’t actually work for McDonald’s.

The NLRB ruling could change all that, however. That “joint employer” language is very literal: It means that Ronald works for both Joe Schmo, Inc. and the McDonald’s corporate office. And if Ronald is somehow wronged, both of those companies are on the hook. The ruling’s rationale is based on which company actually handles staffing. McDonald’s exerts indirect control over employees by supplying things like staffing software and providing guidance to franchisees on employment issues. Therefore, the NLRB argues, McDonald’s isn’t just some disconnected entity; it is actively involved in employment at all its franchises.

Companies like Starbucks and Chipotle, which outright own all their stores in the U.S., are already directly responsible for their employees. But the essence of franchising is quite the opposite: The model has long promised that franchisees are independent businesses that operate at an arm’s length from the corporate mothership. Franchisees run their own businesses following a set of operational standards set by the franchisor. But hiring and firing employees, setting wages and schedules and settling disputes between workers? That’s all Joe Schmo, Inc.

This is why the ruling was received with such shock. If the basic premise of franchising is upended, critics of the ruling argue, and McDonald’s is responsible for the employees its franchisees have hired, then why franchise at all?

In the two-plus years since the ruling, that question has come up a lot -- though nobody is any closer to an answer. Ciara Stockeland’s perspective is pretty typical now. She’s the founder of the 11-unit North Dakota-based discount fashion franchise Mode, and she says the joint-employer ruling calls into question her entire decision to franchise. “My option for growth was to try to grow as a corporate brand and try to manage employees all over the country, or to franchise and have my franchisees deal with those issues,” says Stockeland, who also attended the White House Summit on Worker Voice in 2015 and testified before a Senate committee about the effect on her business. “Now I might be responsible for employees I didn’t hire and have never even met. Expanding under that circumstance is not interesting to me. The liability for me and my family increases with every new store we open.” 

The advantages of the arm’s-length system don’t go to just franchisors. Part of the big appeal of becoming a franchisee is summed up in the old industry chestnut: You’re in business for yourself but not by yourself. In good franchise systems, franchisees get all sorts of valuable help, from scheduling software and payroll support to help in finding and hiring good managers or technical positions.

But the confusion cast by the joint-­employer ruling has led some franchise brands to get rid of some of those support systems in the belief that by having almost zero direct or indirect influence on their franchisee’s workers, they can insulate themselves from liability if those workers screw up or file an unfair-labor claim. Some of those actions are already impacting franchisees.

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Lynn Berberich is feeling the effects. She spent a 30-year corporate career in HR and operations, much of that working for a fleet-management company. Then in 2009, after she was downsized during the recession, she decided that as a second act she’d open a BrightStar home healthcare franchise in her hometown of Baltimore. It was a perfect fit for her. Not only was she passionate about allowing older people to stay in their homes -- her grandmother lived until 107 and was able to live in her home until age 95, and her father lived at home till 90 with the help of in-home aides -- but also she had the business skills to manage and coordinate a crew of 200 home healthcare aides.

Still, as a first-time business owner, Berberich relied on Chicago-based BrightStar corporate for some expensive digital tools, like an applicant tracking system. It’s that type of support that helps convince many business owners to choose franchises instead of setting up their own shop. But after eight years, she’s seeing some of those tools disappear.

Now Berberich has had to purchase an off-the-shelf tracking system and runs her own employee recruitment program -- an additional cost that adds to her overall budget. BrightStar is also considering getting rid of the ADP payroll service it offers to franchisees to help them manage the thousands of healthcare aides they employ. Instead, Berberich and the 174 other fellow BrightStar owners may have to solicit bids and manage their own payroll services -- a huge increase in expense and workload. 

“The advantage of being part of a franchise is that you have access to people with a higher level of expertise,” says Berberich. “I’m not the best person to shop for a payroll or applicant tracking system. I can’t develop that expertise on my own.”

Her most immediate concern, however, is losing access to the HR expertise offered by corporate headquarters. In the past, when Berberich needed to hire a director of nursing or a new salesperson, positions she didn’t feel qualified to fully evaluate, her franchisor would help out. “They had someone who would interview those candidates over the phone and then give me their feedback and concerns,” she says. “Now, because of joint employer, they won’t touch that with a 10-foot pole.”

How necessary are changes like these? The answer depends on whom you ask.

Shelly Sun, founder and CEO of BrightStar, isn’t happy about how much burden she’s had to shift onto her franchisees, but she feels compelled to limit her brand’s liability under joint employer. So far, BrightStar has shelved the applicant-tracking software system franchisees use to find and hire the thousands of home healthcare aides they employ. That alone passes thousands of dollars in costs to her franchisees. One very large franchisee in southern Wisconsin estimates it adds $10,000 per year to their costs. Sun also withdrew plans to offer regional training to franchisees’ employees. She says it has increased the burden on franchisees, but she sees no alternative under the circumstances.

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Despite taking action, Sun had always been optimistic that the courts will eventually strike down the ruling. “Once it’s decided,” she says, “I give a 70 percent probability that we go back to the standard we’ve always had, I’d say a 25 percent chance we agree to some changes and a 2 percent chance of extreme, dire consequences for franchising.” But Catherine Ruckelshaus, counsel and program director at the National Employment Law Project, believes that companies that are withdrawing support because of joint employer are being rash. “It’s shortsighted and premature,” she says.

Ruckelshaus is among the legal experts who see joint employer as something that will not be broadly applicable to the franchise industry. Before the ruling, if employees of a fast-food franchisee were able to form a union, they would be entitled to negotiate with their direct employer, Joe Schmo, Inc., but not the honchos of the Golden Arches. Under the revised joint-employer standard, however, they could be allowed to negotiate with both if they can show that the corporation also has the “right to control,” that is, the final say in deciding these issues. That could open the door to broader unionization among fast-food workers employed by franchisees. In fact, the complaints that led to the joint-employer ruling stemmed from suits filed by McDonald’s workers who claimed they were punished for pro-labor activities when they walked off the job in 2012 as part of a nationwide rally for a $15 minimum wage. 

This whole situation is part of an overall strategy by unions to expand their reach, some argue, not an assault on the franchise model itself. “One takeaway is that this ruling has been on the books for a while and the sky hasn’t fallen,” Ruckelshaus says. “I haven’t seen any additional decisions under the NLRB that corporate franchisors are responsible for their franchisees.”

The fast-food sector is a unique case, she says, but there are other sectors of franchising that joint employer could open up to potential unionization. The hotel industry, for one, believes the ruling sets it up for unionization efforts and has lobbied Congress to set a legislative definition of “joint employer.” There have also been unionization efforts at “fast-casual” counter-­service restaurants (like Five Guys or Chipotle) and casual restaurant brands. 

In that regard, fast food could be just the beginning. But who knows?

So here we are -- in a state of, if not panic, certainly lingering confusion. There’s no clear guidance for franchisors or franchisees on how or whether to prepare for the ruling. There’s no sense of which industries it will ultimately affect, and how, or when. But if Puzder (or someone else who shares his perspective) is confirmed as Labor Secretary, many experts predict that everything will change quickly.

Puzder would not control the NLRB. But Jennifer Platzkere Snyder, a partner and specialist in employment and labor law at Dilworth Paxson in Philadelphia, says he will be a key adviser in determining new board members. There are currently two vacancies on the five-member board -- President Obama never got around to filling them -- and a third is opening up in August. Each Puzder-endorsed nominee will have to move through Congress as well, but Snyder predicts smooth sailing. “You can be sure the NLRB nominees will be business-friendly, practical types coming out of major law firms or consulting operations,” she says. “I think it’s fair to say this will be the swiftest set of confirmations seen in decades.” And this newly constituted NLRB will, she predicts, will be presented with cases that will allow them to revisit many rulings from the Obama-appointed board. 

Lawmakers could also become involved. In September 2015, Republican senator Lamar Alexander of Tennessee and Republican congressman John Kline of Minnesota introduced the Protecting Local Business Opportunity Act, which would have rolled back the NLRB ruling and encoded a stricter definition of “joint employer” -- one that wouldn’t impact franchisors of all types. That bill didn’t go anywhere, though it could be revived in the new Congress. 

Related: Will This Decision Force Franchises to Reconsider Their Business Models?

If the political machinery doesn’t work swiftly, joint employer could still come under review in another way: the courts. Joint-employer-related cases will make their way through the system, and federal judges will either uphold the new standard or strike it down. There has already been one development. In late October, McDonald’s settled one of the labor complaints that initially led to the joint-employer ruling. The company agreed to pay $3.75 million in legal fees and back wages, while its franchisee paid $500,000. Still, the company maintains that it is not a joint employer, and the meaning of the settlement is not clear. And it could take years for the other cases to reach resolution. 

The day after Trump’s election, the International Franchise Association, true to form, didn’t mince words in a statement from its president and CEO, Robert Cresanti: “We urge the president to strike the massive regulatory state created by the practice of legislation through executive order and for congressional leaders to repeal these unnecessary, harmful and overly burdensome regulations, beginning with the newly broadened joint-employer standard.”

The franchise world, in other words, is eager to get the whole thing over with. 

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