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.