SBA Re-examines “Affiliation” Standards for Loans to Franchise Small Businesses

On Dec. 8, the U.S. Small Business Administration published a Notice and Request for Comment on Franchise Agreement Reviews, and Eligibility for Financial Assistance in the Federal Register (79 FR 72753, Docket Number SBA-2014-0014). The SBA, led by Administrator Maria Contreras-Sweet, has been incredibly active in providing loans to prospective franchise small-business owners, with numbers ranging as high as 18 percent of SBA’s total lending, encouraging entrepreneurship and job creation while facilitating the economic recovery. This comment process represents the opportunity to resolve any misconceptions that might exist regarding the independence for franchise small-business owners.

Given that the SBA’s evaluation of “affiliation” between business entities plays a critical role in determining eligibility for loan programs, these misconceptions could have a very real impact on future entrepreneurs looking to start franchise small businesses. By modernizing its rules for establishing “affiliation” to account for the prominence of the franchise business model, the SBA is ensuring that these businesses have the support and consistency they need to grow.

IFA strongly supported the opportunity to comment on this re-examination, sending a letter to Linda Rusche, director of the SBA Office of Financial Assistance, to praise the agency’s efforts to improve the efficiency of the small-business loan process and its willingness to listen to hear the industry’s point of view. The association is currently in the process of developing its official comments and has formally requested a 60-day extension of the deadline by which comments must be submitted, from Feb. 8, 2015 to April 9, 2015. Such an extension would better account for the breadth and diversity of business categories that would be impacted by any changes to franchise small-business loan eligibility.


Labor & Workforce Policy Updates

Dear IFA Members,

With the end of the year upon us, I wanted to take this opportunity to update you on a number of major issues we are addressing for the industry, particularly on the labor front.

On Dec. 19, National Labor Relations Board (NLRB) General Counsel Richard Griffin issued several complaints against McDonald’s franchisees and McDonald’s USA, naming the independent businesses as joint employers. These complaints stand in direct contradiction to the 1968 Southland case in which the NLRB held that franchisors and franchisees are not joint employers. In overturning settled law and over 40 years of consistent legal precedent, the McDonald’s complaints represent a grave threat to the franchise business model by a fiat from the NLRB’s unelected General Counsel. IFA is leading the charge to fight these complaints and will exhaust all legislative and legal means to protect franchising. We will be launching a broad-based lobbying coalition to promote franchising and push back against government overreach in 2015, and we encourage those interested in joining to contact us directly.

Immediately following the issuance of the Dec. 19 complaints, IFA led a joint media teleconference with executives from the U.S. Chamber of Commerce, National Restaurant Association and National Retail Federation to explain the negative impact that these unprecedented complaints would have on thousands of franchise small businesses. IFA and its business group allies strongly condemned the NLRB, pointing out the threat posed to franchise small business owners and their employees. This call received significant media coverage in every major publication including The Wall Street Journal, Bloomberg, and The Hill. Yesterday, twin op-eds in The Wall Street Journal and New York Times staked out the landscape ahead. The WSJ slammed the NLRB, saying the NLRB “tees up a radical rewrite of franchise law,” while The Times took the opposite stance, arguing McDonald’s should negotiate over the terms and condition of employment at its franchised restaurants.

While McDonald’s and franchise businesses are squarely in the crosshairs of the NLRB at the moment, all employers will be facing drastic changes to the definition of who an employer is, and therefore who maintains liability for the employees of the franchisee, when the other shoe drops in early 2015. That shoe is the Browning-Ferris decision, which is likely to adopt the General Counsel’s position that any employer who utilizes a franchise model, independent contractor, subcontractor or supplier network, will be liable for the employees of those businesses with whom it does business.

To help franchise owners comply with changes in labor law, IFA recently launched a new web site,, to provide key guidance to franchisees on labor and employment law challenges.

In the New Year, IFA staff will be reaching out to all of our members to engage you more directly in our efforts to protect the franchise model from these existential threats. We are also seeking franchisees and franchisors to participate more directly in our advocacy efforts through the Franchise Action Network, especially in your locality. If you would like to get involved to protect your business and the franchise model, we urge you to join the Franchise Action Network.

Matt Haller
Senior Vice President, Media Relations & Public Affairs

Labor Board Ruling Could Shutter Small Businesses



In the coming days, the National Labor Relations Board (NLRB) Division of Advice may issue a ruling that will have devastating consequences to franchisees, the mom and pop small business owners of America’s 770,000 neighborhood restaurants, hotels, print centers, realtors and flower shops that employ 8 million workers.

The case currently before the NLRB’s Division of Advice alleges McDonald’s Corporation is a “joint employer” of its franchisees’ employees, despite longstanding legal and contractual terms that clearly demonstrate the opposite is true. Franchisees are independent operators, who simply choose to go into business using a franchise model. Franchisees have separate employer identification numbers with the IRS. Franchisees hire and fire their own employees. The franchisor has brand standards that maintain the quality of products and services, but the brand standards do not include franchisee employment practices and policies.

This legal opinion would upend years of legal precedent, leading thousands of small business owners – locally owned franchise businesses– to lose control of the operations they worked hard to build, threating to put them out of business. With franchise businesses responsible for one out of every eight jobs, 3.4 percent of U.S. gross domestic product and growth rates that have created jobs and new businesses at twice the rate of other business types following the recession, the consequences of this decision on a still-recovering U.S. economy will be immense.

As the NLRB Division of Advice gives its guidance in the McDonald’s case, franchise businesses on every Main Street in America should be wondering what this decision means for their small businesses in the future.

Yes, Council Member Sawant – Franchises Are Small Businesses



Franchising is far more than just fast food. In trying to argue that Seattle franchises are not small businesses, Seattle Council Member Kshama Sawant points to a “Good Jobs Seattle” study that only examines ownership of McDonald’s, Burger King, and Wendy’s. But what Council member Sawant fails to realize is that the franchise industry is made up of 100 business lines as diverse as hotel, real estate, and tax preparation services, which offer entrepreneurs opportunities to start and grow their own business at all levels of investment.

Some franchise owners are small with only one or a few franchise units and – yes – certainly some are larger. However, to classify all of Seattle’s franchise businesses, which provide 19,000 jobs to the Seattle area, as large corporations would misrepresent the many single and multi-unit owners in the city that face the exact same challenges as Seattle’s other small businesses.

What’s more, by equating all franchises to large corporations, as Sawant argues, franchise businesses would be at a disadvantage to other small businesses in Seattle. Under Seattle Mayor Ed Murray’s proposal, businesses with fewer than 500 employees would have seven years to adjust to the new $15 minimum wage, while large businesses and “all franchises associated with a franchisor” – regardless of employee count – would be forced to do so in just 3 years. For some franchisees, this amounts to labor costs 50 percent higher than their non-franchised competitors.

As Seattle Council members debate a “fair” minimum wage for Seattleites, let’s not forget that the employers paying these higher wage should be treated fairly as well. Rather than picking winners and losers among business owners operating under different models, wage increases should be applied equitably to all of Seattle’s employers.

This piece of the proposal is discrimination against Seattle’s small businesses at its worst. Small business owners should not be punished for choosing to be part of a larger “name brand”. All small businesses, like Seattle’s franchisees, should be celebrated for their sense of entrepreneurship, passion and motivation. Don’t frame franchisees for building their small business using a proven model to provide a service to Seattle’s citizens.

Tell the City Council and Mayor Murray that Seattle franchisees own the store, not the chain. Franchises don’t want special treatment, just the same as others.

The slippery slope of government intruding on contracts in franchising…and beyond



This week, Maine is set to hold a hearing on so-called “Fair Franchising” legislation (LD 1458). This legislation, like many others, opens up a Pandora’s Box of ambiguity in contract terms that threaten the basic and proven tenets of the franchise business model, which is all about maintaining the brand, and would leave both the franchisee and the franchisor liable for potential litigation down the road.

The result?  More franchisors and franchisees will be fighting lawsuits versus working together to grow their businesses, add jobs and make the U.S. economy stronger.  Meanwhile, consumers would have a less consistent experience at franchise locations.

The International Franchise Association is working to educate lawmakers in Maine (and elsewhere) about why LD 1458 has damaging provisions that would harm the franchising industry and the 74,100 jobs it supports at 3,674 franchised locations in Maine, which pump $7.4 billion annually into the Maine economy.  Now is a good time to remind folks why IFA is fundamentally opposed to further government regulation of franchising.  The word “further” is a key point here, as the franchising industry is already highly regulated by government at both the state and federal levels, by commercial contract law, state investment law and nationally by the Federal Trade Commission.  Additional regulation is not only bad for business, but it’s bad for the free enterprise, market-driven system that our great nation was founded upon.

To be sure, going into business is inherently risky.  However, without risk, there would be no opportunity for success.  When a person starts a business of any kind, there is a risk of failure, and there is perhaps a greater risk that things won’t work out exactly as planned or envisioned.  Is that fair?  One could argue that it depends on your perspective.

With franchising, due to the contractual nature of the model, there are adequate opportunities for both parties to assess through due diligence the risk before a contract is executed.  The franchisor can evaluate the prospective franchisee and ask questions about if he or she is financially qualified, will be a good operator, and will follow the franchisor’s operating system.  The franchisee gets a detailed disclosure document with information about the franchisor, its business history, and its financials.  The franchise contract spells out the obligation of both parties to each other for the term of the agreement.  At the end of the day, both the franchisor and franchisee can make the decision to sign the agreement or not.

So what are some of the consequences of these so-called Fair Franchise bills?  With regard to Maine, there are several provisions that are very problematic and damaging to the franchise industry.  For instance, franchisors could not terminate, cancel, or fail to renew franchisees for refusing to take part in promotional campaigns for the products or services of the franchise that promote profitability.  That means non-compliant franchisees could benefit from advertising funds contributed by other franchisees who are following the system.  Franchisees also would be exempt from selling approved products from approved suppliers, which could jeopardize consistency and quality affecting the integrity of the brand.  We hear from franchisees that they want the brand protected as much if not more than the franchisors as it has a direct impact on their success.  These negative consequences hurt both the franchisor and franchisees.

In most cases, the root cause of tensions in franchise relationships is due to communication and transparency breakdowns.  Franchisees who feel they are being treated unfairly are encouraged to leverage the many mechanisms in place within the overwhelming majority of franchise systems to work together with the franchisor to resolve issues.  Franchisors ought to be transparent and consult with their franchisees when implementing a new relationship with a vendor, or implementing a new policy across a system and show franchisees why it will ultimately help them.

Franchising works when franchisees are profitable.  If franchisees don’t make money, franchisors don’t grow their system, don’t expand their royalties, and they certainly don’t create the jobs this country desperately needs.  In most systems, communication is very good between franchisees and franchisors.  IFA encourages all of its members to abide by its Code of Ethics, and while not a self-governing body, we believe the best course of action when tensions or disputes arise is through a private dispute resolution, before any legal action is taken.

An IFA-commissioned task force of leading franchisees and franchisors formed last fall is working toward the completion of a core set of principles that it believes franchise businesses should abide by to stave off conflict.  Fundamentally, their intention is to avoid conflict from the get-go by promoting transparency in franchise agreements and trust in franchise relationships.  If things do go wrong, mechanisms should be in place that are understood at the beginning of the contract phase by both parties to address the concerns.

IFA will continue to work to identify best practices to better the industry.  Litigation should always be a last course of action.  Government intrusion in a private right to contract is unnecessary, and will only result in unintended consequences for both franchisors and franchisees.

For more information about the consequences this legislation could have on the economy in Maine, click here