This New Rule Could Disrupt the $825 Billion Franchise System
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“If it ain’t broke, don’t fix it.” Apparently, Washington never learned that timeless lesson. With so much that needs fixing in our country today, leave it to regulators to meddle with one of the few things working extremely well: the franchise system. A new rule issued this week by the National Labor Relations Board (NLRB) threatens to throw off franchising’s winning formula, which contributes $825 billion to our economy every year.
Franchising works by combining two powerful ingredients — successful brands and hometown entrepreneurs — into a system that benefits everyone: workers, consumers, communities, and our national economy. The NLRB’s new regulation changes how these two ingredients mix by making brands and owners jointly responsible for the same employees. Let’s look at the rule in greater depth to understand what it means and how it impacts franchisors and franchisees alike.
What is the rule?
Naming multiple entities employers of the same workers has significant — and confusing — implications for how labor laws are applied and how responsibilities are distributed. The NLRB’s rule change makes franchisors (the brand owners) jointly responsible for the labor practices of their franchisees, whereas previously the franchisees were responsible for compliance with labor laws related to their employees.
Let’s say you own a Coffee Stop restaurant. Until the NLRB’s rule passed this week, you were the sole employer of your workers. You decided when to hire them, how to structure their hours, how to manage them, and if and when to let them go. Most importantly, you solely shaped the employee culture of your Coffee Stop restaurant and created an environment to drive employee retention specific to your unique market. This localized, decentralized control is exactly what has made the franchise business model so successful.
When you own a franchise, you’re the boss. The NLRB’s new rule erodes that control.
When you own a franchise, you’re the boss. The NLRB’s new rule erodes that control. Now, Coffee Stop’s corporate office is deemed the
joint employer with you, meaning it is equally responsible for your employees and will have no choice but to get more involved in your decisions as a business owner. This undermines your autonomy, creates a confusing environment for your workers, and causes a chilling effect on companies that might otherwise be eager to franchise their brands.
The risks at a glance
It’s difficult to overstate the threat this rule poses. Most immediately, the outcome will be an extraordinary increase in costs and legal risks. Franchisors will be liable for hundreds of thousands of workers currently employed by their franchisees. While many may think franchisors are large corporations, the reality is that most franchisors are small businesses too, seeking to become the next McDonald’s – in fact, of the more than 3,000 franchise brand companies operating in the U.S., only 2 percent of them (78 brands) have systemwide sales greater than $1 billion annually. The point is that it’s simply not feasible to transfer the more than eight million employees working for franchisee businesses to the balance sheets of 3,000 franchisors, but that’s exactly what the NLRB has done by government fiat.
It’s simply not feasible to transfer the more than eight million employees working for franchisee businesses to the balance sheets of 3,000 franchisors, but that’s exactly what the NLRB has done by government fiat.
To limit their liability, franchisors will be forced to undertake a variety of costly compliance measures. If the rule stands, they will be forced to exert control over how franchisees manage their day-to-day operations (an area of business operation historically left solely to franchisees). In the near term, as franchisors wait for the imminent flood of litigation to provide clarity to the NLRB’s ambiguous rule, franchisors are likely to “distance” themselves from their franchisees – which immediately adds new costs for franchisees in areas previously offset by franchisor investments. Franchisors may also increase fees to their franchisees to offset these higher costs.
We know the threat of higher costs is real because we watched it happen once before. A similar rule implemented between 2015 and 2017 led to a staggering $33 billion per year in extra operational costs for franchise businesses — not to mention a 93% increase in lawsuits.
New research from Oxford Economics shows that franchisees are bracing for more harm from the new NLRB rule: 70% of franchisees expected increased litigation and costs, and 66% of franchisee respondents expected the new standard to raise barriers to entry into franchising.
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