When Academics Fail to Get the Full Picture on Franchising

Last month, the University of Pennsylvania’s Wharton School of Business Management posted a blog (Knowledge@Wharton) entitled: “How the McDonald’s Franchise Labor Case Could Upend an Industry.”


Wharton, of course, is one of the most respected business schools in the country.

Which makes the blog that much more incredible. The authors completely fail to understand the “joint employer” issue and the broader workings of the franchise model.

The authors were Peter Cappelli, the Director for Wharton’s Center for Human Resources, and Cesar F. Rosado Marzan, a contracts, labor law, and comparative labor law professor at the Chicago-Kent College of Law.  Also included were quotes by Janice Bellace, a professor of legal studies and business ethics/professor of management at Wharton, whose expertise is in the area of labor and employment law and employment relations.

These are surely qualified scholars on labor issues, but something is missing.  Did anyone think to get the views of a franchise business management expert or a franchise attorney?  Someone who is an expert on the franchise business model?

To the labor professors, a franchise relationship looks like an employment relationship, but this comparison brings new meaning to the trite expression that “if you are a hammer, everything looks like a nail.”

For example, Professor Cappelli states there are two types of franchises in vogue.  One is the “trade name franchise,” where the franchisee gets the rights to use the franchise owner’s brand name. The other is an “operating agreement,” which McDonald’s uses, where it sets the rules on how their franchisees must operate the restaurants.

Herein lies the error; there is no such thing as a “trade name franchise.” Any license of a trademark must be accompanied by controls on quality and use of the brand or the trademark “owner” will likely forfeit their rights to the mark, which would be embarrassing to say the least.  The authors should have reviewed the Lanham Act before commenting on the franchise business model.

The authors also mention an “operating agreement,” where there are “rules” on how the franchisees must operate the restaurants. I think they must mean a business format franchise, where the franchisor transfers know-how to the franchisee in addition to the right to use the names and marks.

The brand standards associated with the marks and system are fundamental to franchising—without them, the consuming public would have no assurance as to the origin of the goods and/or services branded and would not know if the expected quality is there. Standards in preparing the hamburger—temperature, patty thickness, safe handling instructions, etc. ensures no one gets sick. Menu consistency guarantees mom and dad know when they pull off the road at Junior’s request who has seen the brand on a sign, that Junior’s favorite will be served at the restaurant. And so forth. But fast food is not the only franchised business. Practically any business can be franchised if the operating know-how is replicable.

Professor Cappelli continues, “in the operating agreements you can tell franchisees pretty much how to do everything.”


In each and every franchise system, the franchised businesses are independently owned and operated. These franchisees are entrepreneurs. While they must follow certain rules relating to brand standards, they set their own course as to everything else. They determine their day-to-day functions of their businesses. They determine who to hire and fire, the hours of the employees, the pay scale, and the duties of each employee, just like any other small business owner. And it’s their capital that finances the business; their capital is at risk.

Further underscoring the authors misunderstanding of franchising was Professor Rosado’s statement lumping McDonald’s and Walmart in the same category. While they are both “large corporations,” Walmart is not a franchise.

Professor Cappelli asserts, “Over the last generation, there have been lots of efforts by employers and businesses to get out from under the requirements of employment law.” So by implication, franchising is simply a ploy to avoid employment law compliance.

Nothing could be further from the truth.

The business format franchise in its current form has been around since the 50’s. Franchising now accounts for 5.6% of the GDP and 9.1 million direct jobs. It is successful because it harnesses the extraordinary drive of the entrepreneur.

In a public policy blog, one must consider the public policy implications of taking a business model that has been around for 60+ years, and has become a substantial part of the economy, and “upending” it. At the very least, this piece lacked insight by failing to include franchise experts and instead solely considered the thoughts of labor/employment professors.

And as relates to public policy, Professor Cappelli even says “[p]art of the knowledge [imparted by the franchisor to the franchisee] is, frankly, how to employ low-wage unskilled people and get them to turn out this consistent, stable product.  Maybe it is not a bad thing to take a person without work experience and teach them how to make a good product, interact with the public, show up on time, and maintain a professional appearance – things needed to get and keep a job.  For most workers, a fast food job is not their ultimate goal—rather, it is a first step, a bridge to a better place in the workforce.

So Knowledge@Wharton? You’re absolutely correct for diving in on a significant labor policy, but you should not have made the mistake of only analyzing one side of the equation. It could hurt America’s economy and deprive entrepreneurs of their livelihood.

Speaker Ryan Creates Environment for Vibrant Policy – Will Congress Deliver?

Yesterday morning, Speaker of the House Paul Ryan (R-WI) delivered an address geared towards future generations and the promotion of policy debates, noting that Congress can play a vital role in restoring the American people’s faith in elected officials.  During his speech, the Speaker noted the political climate in Washington has devolved from meaningful policy discussions and turned to a game of identity politics that often leaves the public yearning for more. Even worse, Ryan noted that Congress should be part of the solution, rather than part of the problem. This entire narrative comes full circle with the Speaker’s promise to focus on making America thrive again, especially for those who are most vulnerable.

The American people are frustrated, and Speaker Ryan’s address serves as an elucidating moment for Congress: start serving the people or run the risk of diminishing America’s future potential. For those in franchising, and small business owners in general, the message could not be more salient. Entrepreneurs serve as the foundation for America’s economy and opportunity. Franchising alone accounts for nearly 8.9 million jobs – with an expected growth to 9.1 million in 2016 – and nearly $900 billion in economic output. For a business model that is churning out jobs and income for so many, one would think those in Congress would be working to promote and protect the industry. Unfortunately, Washington bureaucrats and organized labor groups are orchestrating a strategy that will hamper job growth and threaten the dream of small business ownership for countless Americans over the coming years.

If Congress takes to heart the Speaker’s message detailing efforts to eradicate poverty and promulgate effective policy solutions, the franchise model is a perfect place to start.  Take, for example, the National Labor Relations Board’s (NLRB) nebulous new “joint employer” standard.  For years, franchisors were legally separate entities from franchisees until pro-union bureaucrats flipped the standard on its head. As a result, franchise small business owners are cast into an abyss of uncertainty. Last year, Sen. Alexander (R-TN) and Rep. Kline (R-MN) took the initiative to introduce the Protecting Local Business Opportunity Act, a bill aimed at restoring the traditional standard. Unfortunately, partisan jockeying on the legislation prevented a floor vote, despite the fact it passed the relevant committees. This legislation represents a clear opportunity for Congress to get back to policy making and facilitating avenues of advancement for America’s impoverished. Speaker Ryan has made his intentions clear; now it’s time for elected leaders in Washington to serve their constituents by promoting a business model that positively impacts millions of America’s success stories.

New Study: Franchise Businesses Suffer Most Under $15 Minimum Wage Increases

Increasing the minimum wage has long been a popular tactic for liberals in the political sphere seeking “fairness” for workers.  To the casual observer, the idea that someone should earn a so-called “fair wage” appeals to their moral conscience without immediately conjuring up the economic impact of such actions on a large scale.

While there has recently been a national debate about raising the current federal minimum wage from $7.25, Congress has rebuffed those efforts, based largely on evidence from the nonpartisan Congressional Budget Office that 500,000 workers would lose their jobs, wiping out any improvement in wage levels for those entry-level workers who remain in the workforce. In response, an increasing number of states and cities are being pressured by liberal activists to raise their own minimum wage.

Most localities have passed new wages based on economic and cost of living conditions. However, in some places, a unique and potentially damaging characteristic of some wage proposals has a trend to include a provision requiring families in local communities who own franchises to pay wages higher and faster than those paid by non-franchise businesses.

Take the city of Seattle or the state of New York for instance. Each passed an increase in the minimum wage to $15 per hour, both discriminatory in their own way.  In Seattle, the legislation considers independently operated franchisees as ‘large employers’ because they contract with a brand, and subsequently forces them to implement the increase faster than local, non-franchise businesses. Meanwhile, in New York, Gov. Cuomo unilaterally targeted quick service restaurants through a “Fast Food Wage Board” which consisted of no small business owner representation. This wage increase required those families who operate a local restaurant with 30 or more locations nationally to pay a $15 minimum wage, and leaving other businesses at the more modest $9 state-wide minimum wage.

Perhaps the most perplexing notion in both cases is that wages were raised under the auspices of fairness.  What could possibly be fair about requiring one family who owns a small business to implement a wage at a faster pace than another, or leaving those employees who DON’T work for these businesses at a lower rate.

To address the impact of this new trend in policymaking, new research from the Employment Policies Institute (EPI) overwhelming disproves the notion that franchise businesses could absorb an increase in the minimum wage easier than non-franchise businesses.  According to the study, franchise businesses would be impacted more, with over two-thirds of franchise small business owners saying that they would be forced to reduce staff or reduce hours to compensate, compared to roughly half of non-franchise businesses.  Additionally, 54 percent of franchisees said they would likely use more automation, compared to just 37 percent of non-franchise businesses.

“This study confirms that local franchise businesses, who form the fabric of their communities, should not be unfairly targeted for higher labor costs than non-franchise businesses,” said IFA Director of State Government Relations and Public Policy Jeff Hanscom. “Arbitrarily forcing higher labor costs on franchise small businesses will reduce employment for those who need it most, while stripping neighbors of their ability to own a small business.”

As policymakers around the country continue to face pressure from local activists seeking to raise the minimum wage to exorbitant levels, it is clear they should avoid choosing winners and losers.

At Kemp Forum, Opportunity Agenda Thrives

All too often, when Americans look to politicians in Washington, D.C. for solutions to America’s numerous domestic issues, a convoluted package of policy proposals and regulations overwhelm the menu. Rather than addressing the root causes of economic distress or poverty, politicians provide patch-work solutions that often cost tax payers, while failing those in need.

This past weekend, however, some of the most powerful thought leaders and politicians in America gathered at the Kemp Forum on Expanding Opportunity in South Carolina to buck the trend, and prescribe an avenue for alleviating poverty that focuses on people, rather than stale policy. Organized by the Jack Kemp Foundation, the namesake organization for the late Congressman and “bleeding heart” conservative Jack Kemp, the Expanding Opportunity event sought to examine why the so-called “war on poverty” has failed so many of our fellow citizens, and what we as a nation can do to enable prosperity.

Moderated by Speaker of the House Paul Ryan (R-WI) and Sen. Tim Scott (R-SC), the event included panels with six Republican presidential hopefuls and American Enterprise Institute President Author Brooks, with a focus on reforming areas from education to spurring job growth. The participants rightly noted that America was founded on the principle that everyone would have the same opportunity to succeed in life, not the same guaranteed outcome. As part of this narrative, the moderators drove the dialogue that our country is at its best when innovators and entrepreneurs thrive, not when the government continues to implement workplace regulations and social assistance programs that entrench the cycle of poverty and big government.

While everyone on stage agreed that small businesses are driving the economy, it was obvious that a litany of failed policies continue to plague the opportunity agenda.  Sen. Scott noted that in a time when young people need to develop professional skills and learn the responsibility that comes with work ethic, inane policies such as $15 minimum wage proposals will force youth unemployment rates to skyrocket, leaving yet another generation at a gaping disadvantage to compete in the labor force. As business owners reconcile with increasing costs, some will be forced to shutter their dream. Several candidates made the plea that power return to the states, arguing that bureaucrats in Washington, D.C., who are out of touch with small communities, are generating burdensome rules that make entrepreneurship nearly impossible.

Presidential politics always brings with it a plethora of idealistic proposals and rhetorically pleasing soundbites. But, at the Kemp Forum on Expanding Opportunity, audience members were treated to solutions that could start a wave of growth for the next generation. Poverty is not eradicated by simply instituting equality with social programs and regulations.  In order to solve poverty, it must be tackled at its root cause: replenishing a lack of opportunity that will enable hard-working Americans the chance to make their own American Dream.  Franchising is a clear path to giving Americans that chance. The IFA looks forward to engaging the candidates and working with campaigns to ensure that America continues to be a land of opportunity. Guided by the new messaging and leadership of Speaker Ryan, our Country and its entrepreneurs can grasp greatness and ensure that everyone has the freedom to pursue their goals, irrespective of politics.

SEIU Endorses Clinton Candidacy – What About America’s Small Businesses?

On Tuesday, the Service Employees International Union (SEIU), one of the largest private sector unions, endorsed Hillary Clinton in the 2016 Presidential race. This decision by the SEIU executive board came amidst objections from local SEIU chapters, some of whom say that the endorsement came too early in the election cycle. The controversy is heighted by Clinton’s failure to support SEIU’s keynote initiative, the ‘Fight for $15,’ aimed at raising the minimum wage to $15 per hour. Instead, Clinton has spoken out numerous times in support of a $12 per hour minimum wage.  The endorsement reflects an alarming trend that a Clinton Administration would feature more pro-union policies, following the lead of the Obama Administration.

However, while the SEIU’s approach to solving income inequality is centered on disruptive protests and PR stunts against businesses, IFA’s President & CEO Robert Cresanti argued against harming America’s small business owners: “There is no question we should be looking at solutions to address the growing economic divide in America. However, staging street theatre and shutting down restaurants owned by local families who have invested their life savings and created jobs in communities cannot be the answer.”

The franchise industry is responsible for creating nearly 9 million direct jobs for Americans, outpacing job growth relative to the rest of the economy year after year.  If drastic minimum wage increases take effect, many of these workers will be priced out of the labor market, thereby increasing unemployment and failing to provide millions of workers with the skills needed to excel in a competitive environment.  Regulatory burdens such as the National Labor Relations Board and the Occupational Health and Safety Administration attempts to redefine the “joint employer” standard – which the SEIU has advocated for – have put the country’s more than 780,000 franchise establishments at risk. Despite franchising outpacing the gross domestic product of the rest of the economy, America’s small business owners face a perilous environment if these anti-growth policies persist.

In the future, the inequality debate should focus on creating opportunities to enter the middle class, rather than disruptive political theatre that targets America’s entrepreneurs.