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.”

Indeed.

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.”

What?

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.

States Lead the Charge Against Joint Employer Overreach

The National Labor Relations Board’s (NLRB) August 2015 ruling in Browning Ferris Industries completely upended the standard definition of “joint employer,” throwing thousands of business arrangements into limbo.  In doing so, the NLRB ignored legal precedent and can now hold franchisors liable with their franchisees for labor violations.  Despite this sweeping federal regulation, a plethora of state legislatures are defying the NLRB and passing legislation that preempts the new “joint employer” standard, opting instead for the traditional definition that franchisors and franchisees are separate entities.

A recent Bloomberg BNA article highlighted the role that IFA, along with other business oriented groups, has had on facilitating this proactive franchise legislation across the US.  “We are actively pursuing this legislation this year and have a strategy to continue pursuing this legislation in as many states as we can going forward,” said Jeff Hanscom, IFA director of State Government Relations. The IFA has successfully passed bills in Michigan, Louisiana, Tennessee and Texas, while legislation is moving in Colorado, Georgia, Indiana, Utah, Virginia, and Wisconsin.

Michigan is the most recent state to codify the franchisor-franchisee relationship, and bill sponsor Rep. Eric Leuthesuer (R) explained why he chose to take action on this issue: “What you are seeing in the states is legislatures looking at things that probably never needed to be addressed in statute because they were largely considered settled, common sense or intuitive for a long time. And now, because of court rulings, a lot of things that were common sense are now being thrown into some confusion, or potential confusion, or potential chaos. That’s not good for anybody.”

Through the Coalition to Save Local Businesses, the IFA continues to pressure Congress to act on the “joint employer” issue and provide a remedy for small business owners in America.  Judging by the success the IFA has had in state governments, it is clear that these legislators see the negative consequences impacting business owners in their districts, and states continue to lead the way.

Amendment to Stop Micro-Unions Fails in Committee

Yesterday, Sen. Lindsey Graham (R-SC) proposed three amendments to the 2013 Labor / Health and Human Services appropriations bill that would overturn recent National Labor Relations Board (NLRB) decisions involving union elections.  Most notably, one amendment would have prohibited NLRB from using funds to enforce the Specialty Healthcare rule, in which NLRB opened the door for the creation of micro-unions.  The amendment failed by a vote of 15-15, while amendments to prohibit “ambush elections” and card-check elections also failed by votes of 13-17 and 14-16, respectively.  Read the press release from Sen. Graham’s office here.

Sen. Lindsey Graham (R-SC)

On Wednesday, Sen. Graham joined several associations on a media call to discuss how the NLRB micro-union decision will create division in the workplace and undermine job creation.  Saying that “The NLRB is the Grim Reaper of job creation”, Graham discussed the amendments he would introduce the following day in the Appropriations Committee to restrain the NLRB.

The Coalition for a Democratic Workplace, of which IFA is a member, submitted an amicus brief to the National Labor Relations Board regarding a representation case involving the department store Neiman Marcus, where a bargaining unit of sales people in the women’s shoe department was found to be appropriate by an NLRB Regional Director.  This is a perfect example of how the new micro-union standard in Specialty Healthcare is being applied to representation cases.  Read the amicus brief here.

Kline bill passage a victory for IFA and franchise businesses

Aside

Yesterday, the House voted 235 to 188 in favor of H.R. 3094, the Workforce Democracy and Fairness Act.   IFA will be working to ensure the bill receives some attention in the Senate, but is unlikely to come to a vote anytime soon.  

In addition, yesterday the NLRB held a hearing where they voted 2 to 1 in favor of a resolution offered by Chairman Mark Pearce to streamline the ambush election proposed rule.  Member Craig Becker and Chairman Pearce voted in favor of the proposal, while Member Brian Hayes dissented, criticizing the substance of the proposal as well as the Board’s failure to follow procedural rules. The Board will now move forward with drafting a final rule based on the Chairman’s resolution. 

Based on the resolution, we expect the final rule in the next few weeks.  The rule will not contain some of the more widely discussed aspects of the proposed rule, such as the 7 day period for a hearing and the requirement employers release employee phone numbers and email addresses.

The final rule, nonetheless, is still expected to significantly truncate the time period for elections and deprive employers of many due process rights.  In short, the streamlined rule would radically change election procedures in an effort to promote rapid, increased unionization at the expense of employees and employers.  

The Board’s information about the hearing, including a video archive that will be posted later today, is available here.

Posted by Jay Perron, IFA Vice President of Government Relations & Public Policy