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.

U.S. Chamber says economic growth should be “front and center” in 2013; tax reform can “turbo-charge” growth

This morning, IFA was fortunate to have a front row seat at the annual “State of American Business” event at the headquarters of the U.S. Chamber of Commerce, the world’s largest business association located across Lafayette Park from the White House. The event, which brings together representatives from trade associations representing all sectors of the U.S. economy, sets the tone for the annual lobbying agenda for the business community.

U.S. Chamber President Tom Donohue

Chamber President Tom Donohue laid out a series of pro-growth priorities sure to excite anyone in the franchise industry who is frustrated with the ongoing pace of the recovery. According to Donohue, the American Jobs and Growth Agenda would generate stronger economic growth by producing more American energy, expanding American trade, modernizing our regulatory system, and reforming our immigration and visa policies. The agenda also emphasizes the urgent need to address the fiscal crisis with a bold plan that slows the growth of runaway spending, reforms entitlement programs, and overhauls our tax code. According to IHS Global Insight, franchise businesses have been on a slow, but steady, recovery from the recession, and now stand poised to accelerate growth plans if more confidence could be instilled in the economy for existing and prospective franchise investors. As such, Donohue’s comments and the Chamber’s agenda in the year ahead should be welcome news to franchisees, franchisors or prospective franchise investors.

“Economic growth cannot solve all of our problems, but without growth, we will not be able to solve any of them,” said Donohue. “The imperative of economic growth should not be an afterthought. It must be job one. The over-riding objective of this ambitious plan is to generate stronger economic growth in order to create jobs, lift incomes, and expand opportunity for all Americans. America needs big solutions so it’s time to put the smallness of politics aside. We call upon all of America’s leaders in and out of government to put country first.”

Specifically addressing the need for comprehensive tax reform, which is a top priority for IFA, Donohue cautioned lawmakers against using tax reform as a vehicle to continue their reckless spending habits. “Tax reform is not a substitute for spending restraint. It must be done after or concurrent to spending cuts. The right kind of tax reform will turbo-charge our growth, create jobs, and generate more revenues for government at all levels” He warned that the tax increases recently levied on small businesses as a result of the end-of-year fiscal cliff deal will hold back growth in the first part of the year.

“As illustrated by the Chamber’s latest survey of small business members, there is significant uncertainty over health care, regulations, taxes, and deficits,” he said. The Chamber’s Small Business Survey results echo IFA’s latest member survey, which showed the uncertainty of numerous regulatory and public policy challenges were holding back growth.

In IFA’s survey, 64 percent of franchisors report the Affordable Care Act will create some significant uncertainty in long-term planning and healthcare reforms will create significant uncertainty in long-term planning for 71.6 percent of franchisee respondents. More than 10 percent agreed with the statement: “We are no longer confident that our business model is profitable.”

The Chamber forecasts growth of 1.5-1.75 percent in the first half of 2013, with growth accelerating to as high as 2.5 percent in the second half of the year. But Washington “deadlines” in the coming weeks and months, such as the need to raise the debt ceiling and pass a budget, may overshadow growth and will continue to shake the confidence of the business community.

On the bright side, if Congress can address these policies, it will likely accelerate job creation and franchise development across the nation. According to IFA President & CEO Steve Caldeira, franchise growth remains slow due to the rising tax burden placed on small business franchisees and the out of control spending by Washington on entitlement programs.

“While we are pleased the industry continues growing at faster rates than other sectors of the economy, we could be growing much faster, creating more new jobs and businesses, if Washington addressed the tax, spending and regulatory uncertainty plaguing the small business community in a meaningful way,” Caldeira said during the recent unveiling of IFA’s 2013 economic forecast for franchising.

To read or watch the full speech, please click here.

On Friday, Feb. 3, Bloomberg TV ran a jobs story “The Big Business of Franchises” featuring two

On Friday, Feb. 3, Bloomberg TV ran a jobs story “The Big Business of Franchises” featuring two IFA member companies, Valpak and Lucille Roberts, a women’s health center franchise. 

The segment, which aired just prior to the release of the Department of Labor monthly jobs report showing the economy created 243,000 jobs in January and the unemployment rate dropped to its lowest level in years of 8.3 percent, highlights franchising as a bright light in the still-challenging economic recovery. 

The segment summarizes IFA’s 2012 Economic Outlook for Franchise Businesses, which projects that after three years of decline due to the recession, franchise businesses are poised to grow approximately 2 percent in terms of establishments and jobs in 2012. 

Posted by Matt Haller, IFA Sr. Director of Communications

As Congress finally wrapped its back-and-forth debate last week about how long to extend the payr

As Congress finally wrapped its back-and-forth debate last week about how long to extend the payroll tax holiday (ultimately agreeing to a short, two-month extension with a promise to re-visit the issue in a conference committee in January, IFA President & CEO Steve Caldeira joined FOX News America Live Dec. 23 to discuss the outlook for franchise businesses in 2012. “Franchising remains a bright light in a still challenging public policy environment, but we are still nowhere near the growth rates experienced before the election” Caldeira said. 

Franchises are projected to add 168,000 new jobs and 14,000 new establishments in 2012 according to IFA’s 2012 Economic Outlook for Franchised Businesses prepared by IHS Global Insight, Caldeira told FOX’s Heather Childers. Yet they still face a host of other issues that are keeping growth rates below pre-recession levels, including the health care law’s employer mandate, uncertainty about tax rates and the continued difficulty accessing credit.

“The health care law continues to loom as a disincentive to job creation, particularly for multi-unit operators due to the employer mandate and 50 employee threshold for paying a penalty,” he told FOX’s Heather Childers. “Franchise small businesses need comprehensive tax reform that lowers the corporate and individual rates and provide certainty beyond 2012,” Caldeira said. 

Posted by Matt Haller, IFA Sr. Director of Communications