Franchising’s Future is Kinda Up in the Air After the McDonald’s Ruling

The franchising industry is in a state of uncertainty, and its growth could derail.

Yes, the franchising model has proven to be highly successful, enabling small business ownership for hundreds of thousands of people in the United States. Franchisors have worked diligently to create proper systems and support for their franchisees that allow their brands to thrive and promote the success of the American economy. Indeed, the franchising industry is characterized by continuous growth and expansion; it is expected that 2015 will mark the fifth consecutive year in which the industry will grow and create more jobs faster than the rest of the economy.

But the time-tested model is in question after in July 2014, the National Labor Relations Board in the U.S. announced that a franchisor could be designated as a joint employer of its franchisee’s employees.

What This Means

This ruling stems from the NLRB receiving numerous complaints from fast-food workers of McDonald’s franchisees, saying that the company and its franchisees were violating employees’ rights. Of the 43 cases found to have merit, NLRB ruled that McDonald’s, USA, LLC could be held responsible for joint labor and wage violations by its franchise operators. As a result, the NLRB stated that McDonald’s should be considered a joint employer of its franchisees’ employees.

While this particular ruling applies only to McDonald’s, many fear that it will spread to other franchises — and not just mega brands, but even the smallest emerging franchises. If the ruling is extended, the consequences for franchisees will be disruptive, resulting in increased costs, less autonomy, and a decrease in control of day-to-day operations — a defining characteristic of the franchise model. As such, franchisors will take over more of the everyday decision making of their franchisees, such as hiring and human resources activities, in order to decrease the risks associated with litigation over perceived violations.

The Impact on Franchisees

To understand how the ruling will affect franchisees, first look at where things are today. Franchises are considered legally separate businesses in terms of employer standards. They are typically responsible for front-line workers and handling the hiring, termination, discipline, supervision, direction, and advancement of their staff. Any employment lawsuits are therefore typically aimed at the franchisee, being the direct employer.

Should the McDonald’s ruling expand to other franchises, franchisors and franchisees would be considered joint employers whenever the franchisor exercises indirect control over the franchisees. Indirect control can include factors such as the franchisor monitoring the procedures of franchise employers, franchisee employees wearing franchisor uniforms, the franchisor providing or conducting employee training, and the franchisor setting the prices of sold goods or determining the equipment used by the franchisee.

Since these requirements describe most franchisor-franchisee relationships, almost all franchisors would be considered joint employers with their franchisees. As a result, franchisors would be forced to create new systems and processes for controlling employment and handling staffing issues across their franchises. The franchisor will take on additional burden, such as playing a larger role in the hiring and talent management processes of their franchisees. This entails the need for a new approach that can create consistent hiring practices across each franchise in order to reduce the risk for litigation.

Preparing for Change

Although the NLRB’s joint employer ruling creates much uncertainty about the future of the franchising industry, it does not have the power to destroy a business model so entrenched in the American way of business. Still, franchisors must be prepared for the potential impacts, which would require that they create consistent hiring practices across their franchisees in order to reduce the risk of litigation.

As a result, the franchisor can be confident that all hiring activities across their franchisee landscape are based on the same standards. Not only will this help to ensure the best people are hired, but it will also lead to a more positive image of the brand and increased profitability.

While it remains to be seen if the ruling that makes McDonald’s a joint employer with its franchisees will be extended throughout the industry, franchisor, and franchisee alike must understand the far-reaching effects of this potential change and be prepared to address the consequences. By considering their options now, and knowing how to mitigate risk and protect the brand, franchisors and franchisees can ensure a successful future, no matter what the NLRB rules.