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.

House Hearing Demonstrates New DOL Regulations Will Hurt Businesses and Workers

On Wednesday, June 10th, major regulatory changes expected from the U.S. Department of Labor (DOL) this summer were the subject of a House Subcommittee on Workforce Protections hearing. The forthcoming changes include the potential doubling of the salary threshold for overtime exemption and a new test for the primary duties of overtime-exempt workers. These modifications should concern franchise businesses, as they could severely limit opportunities for lower-level employees to advance in rank, limit the flexibility of business owners to manage their workers as they see fit, and increase compliance and payroll costs.

Subcommittee Chairman Tim Walberg (R-MI) shared his hope that despite an “administration notorious for overreach”, the Department of Labor should listen to employers’ concerns, and put forward a “proposal that encourages rather than stifles productivity, personal opportunity, and economic growth.”

The Subcommittee heard testimony from industry experts and academics regarding the current and proposed regulatory framework. While the witnesses disagreed in some aspects, they all agreed that the current enforcement structure of the Fair Labor Standards Act (FLSA) of 1938 needs to change. Three of the key witnesses were: Seth Harris, former Acting Secretary of Labor, Jamie Richardson, a Vice President of White Castle, Inc., a well-known quick service restaurant chain and Leonard Court, a labor lawyer and member of the U.S. Chamber of Commerce Labor Relations Committee.

The majority of Mr. Harris’ testimony addressed why the DOL should prioritize combating income inequality by raising the Federal minimum wage and increasing the salary threshold. To back up his claims, he relied on his theory that workers will see pay increases because employers will be forced to reclassify previously overtime-exempt workers as hourly workers, and these workers will then get more 1.5x pay for overtime for the work they previously did on salary.

Mr. Harris’ theories were countered by Mr. Richardson of White Castle, Inc., whom represented the views of many private-sector companies. Mr. Richardson explained that these new regulatory changes will add significant compliance costs, drive down worker opportunities and disrupt business in a negative manner. For example, of the over 400 White Castle restaurants, 445 of the 450 managers started as a cashier or a line cook, and worked their way up. If the primary duties test for a salary employee is narrowed based on strict percentages of time spent on managing, there will no longer be as many opportunities for lower-level employees to get managerial experience necessary for this advancement process. This is because a strict definition of primary duties will no longer afford many managers the flexibility to lead from the front and help out with non-managerial duties as needed. Employers will be forced to choose between classifying a worker as strictly management, and strictly hourly, which will in turn, reduce the amount of managers it can hire. It will also reduce opportunities for workers who depend on the ability to work outside the office to promote flexibility, because they will now fall under strictly hourly regulations, and out-of-office work is hard to measure on an hourly basis.

Contrary to Mr. Harris’ suggestion that these overtime changes would result in additional hours for many workers, Mr. Richardson and another human resources professional on the panel testified that- a reduction of salaried positions will also lead to reduced hours, reduced pay, and a feeling of demotion by these formerly salaried employees.  In addition, Mr. Richardson noted an Oxford University study on the effects of an increased salary exemption, which found that an increase to a salary exemption limit of $808 per week, would affect 1.7 million restaurant workers, and would cost business owners $5.2 billion per year. These increased costs will have a negative impact on raises, health benefits, and generous leave policies.

Leonard Court, a member of the U.S. Chamber of Commerce’s Labor Relations Committee, testified about how unfair DOL enforcement techniques create a negative environment for businesses. He cited numerous examples about how Wage and Hours Division investigators have been using a variety of “questionable” tactics to pressure business owners and human resources professionals into unfair and possibly unjustified settlements. Mr. Court also expressed concerns that the DOL needs to release more administrative interpretations of existing law, in order to give businesses more guidance on how to effectively comply with a complex web of regulations.

Among other issues, the three most concerning tactics employed by the DOL were: deliberately pressuring businesses not to use legal counsel, compelling immediate settlements by threatening litigation, and using bait and switch techniques to grab double punitive damages for new cases by using settled ones as admissions of guilt. These tactics result in an enforcement environment that, in the words of Mr. Court, has shifted from an approach of “cooperation and education to one of confrontation and coerced settlement.” Mr. Court cited one case that demonstrates this attitude, where despite months of investigation and six figures of legal fees, the WHD found no wrongdoing by the employer. The tactics and methods of the DOL are even more concerning in light of the Obama Administration’s authorization of expansive funding for franchise-specific Wage and Hour Division investigators.

The final version of these regulations is expected to be released soon, and it appears the potential changes are already creating uncertainty for businesses. As witnesses like Mr. Court and Ms. Berberich, a member of the Society of Human Resource Management observed, more helpful changes the DOL could make include adding clarity to the laws through opinion letters, and by promoting flexibility for the new generation of tech-savvy workers. Written transcripts of witness testimony can be found here, and the video of the full hearing is available here.

Franchisee Leads Breakout Session on Disaster Response at U.S. Chamber of Commerce Foundations, 2013 Corporate Responsibility Conference

This week, the U.S. Chamber of Commerce Foundation hosted its Business Civic Leadership Center (BCLC) 2013 Corporate Responsibility Conference, effectively themed The Network Effect: How Business Drives Progress. It was an opportunity for businesses and leaders of corporate responsibility to convene around a variety of issues including energy and water use, woman’s economic empowerment, nutrition, and disaster resiliency.

Mitch Cohen, Franchisee, Dunkin’ Donuts & Baskin-Robbins, and April Schrenker, Manager, The Dunkin’ Donuts & Baskin Robbins Community Foundation, participated in the Tapping Into Community During Disaster Response, Breakout Session. Here, they led a discussion on Corporate Social Responsibility (CSR), and how Dunkin’ Brands’ Community Foundation has grown and operated since its launch after Hurricane Katrina. The Community Foundation provided disaster recovery efforts and donations to the affected victims and areas impacted by Hurricane Katrina. Seven years later, The Community Foundation has evolved into a grassroots campaign with a focus on mobilizing disaster response efforts through Dunkin’ Donuts & Baskin-Robbins’ community based franchise locations nationwide.

Best practices and constructive ideas were shared among business owners, and spokesmen and women from relief agencies like American Red Cross and the Federal Emergency Management Agency (FEMA), aligning with the central point of the session, “One of the best sources of information on how to help disaster impacted community is by having employees on the ground. Whether it is a franchise owner or store manager, businesses can make smarter decisions and determine how best to help by leveraging their on-the-ground network.”

Cohen, franchise owner and operator of 13 Dunkin’ locations, is also Co-Chair of the Community Foundation, which has built a framework that allows the Dunkin’ Brands family to give back to those who help them every day in their communities. When speaking of the Foundation’s recent efforts after Hurricane Sandy, Cohen described how the Foundation likes to base decisions, not just on the ‘here and now’, but on effective response and recovery efforts that, “make a difference six, eight, and twelve months down the road.”

“Establish a mission with whom you’re giving to, and what for. Set expectations and guiding pillars that allow you to define certain criteria and expectations” added Cohen, when speaking of who to give to and for what reasons. The Foundation partners with national nonprofit organizations, in addition to regional and local level franchisees to support three critical issue areas, children’s health, hunger and safety. Since 2006, the Foundation has donated more than $4.4 million to organizations serving their neighborhoods.

Click here to view the 2013 Corporate Responsibility Conference online agenda.

Missed the IFA Financial Summit? Relive it with the WSJ’s live blog coverage


Link: Missed the IFA Financial Summit? Relive it with the WSJ’s live blog coverage

The first panel at the IFA’s Financial Summit was live-blogged over at the Wall Street Journal’s Small Business page, so if you missed any of the lively discussion about the biggest challenge facing franchise businesses in 2012 – credit access – head on over and read this recap. In addition to the WSJ’s Small Business reporter Emily Maltby, the panel featured IFA President & CEO Steve Caldeira, IFA Credit Access Task Force Chairman Bill Hall (a Dairy Queen franchisee), Ron Feldman, CEO of Franchise America Finance, Mary Jo Larson, Publisher, Franchise Times; and Darrell Johnson, President & CEO, FRANdata.

The panel was a preview of IFA’s second Small Business Lending Summit, which will be held in Washington on April 17. While lending has loosened somewhat in 2012, the franchise industry is still not back to where it was in terms of growth rates before the recession, so stay-tuned for more action in the coming months about steps the IFA is taking with its partners in the Small Business Lending Campaign to spur franchise small business lending. 

Posted by Matt Haller, IFA Sr. Director of Communications