Franchising Faces ‘Perfect Storm’

Franchisees face off against big labor and big government

• May 4, 2015 2:25 pm


Veteran management-side labor attorneys say franchise businesses are facing a "perfect storm" of assault from labor regulators and unions.

The franchise model, in which small business owners pay corporations such as McDonald's to operate under the brand, face pressure from labor giants like the Service Employees International Union (SEIU) and scrutiny from the Department of Labor (DOL) and National Labor Relations Board (NLRB).

The DOL has said that investigating wage practices in many industries heavily populated by franchising, such as hospitality and service, will be a key focus area of investigation. The NLRB is considering the creation of a new joint employer standard that could eradicate small business operations. The potential upheaval was the focus of the International Franchise Association Legal Symposium on Monday.

"It’s fair to characterize what’s going on now … as a perfect storm," said Norman Leon, a partner at DLA Piper LLP.

The approach from regulators marks a stark change from nearly 50 years of labor precedent.

The NLRB has long considered franchise operators and corporate brands to be separate entities as long as franchisees control operations of employee relations, such as scheduling, hiring, and pay. NLRB General Counsel and former union attorney Richard Griffin broke with that precedent when he held McDonalds liable for the actions of its franchisees in 2014.

Leon said that employers are treading on unfamiliar ground.

"The potential impact … is something many of us have never dealt with before," Leon said. "Under their standard laid out by the general counsel, none of us know where he is going."

Michael Lotito, a shareholder at Littler Mendelson, told the crowd that franchise businesses should not mistake overzealous regulators for the driving force behind the movement.

He said the NLRB’s action represented a handout to organized labor, which wants to use joint employer standards to unionize fast food companies from the top down, rather than store by store.

"It looks like the NLRB is your opponent. They’re just helping your opponent. Your opponent is organized labor," Lotito said. "They’ve got no choice. This is a death spiral for them … they don’t want to organize your employees—they want to organize your company, and your company will cave."

Exploiting labor regulators is a cost-effective manner to penetrate a market that has been tough to unionize because of high turnover and a young labor market, according to Cornell University Professor David Sherwyn. Individual lawsuits come with costs, but the government has unlimited legal resources to pursue cases against franchisees and is not bound by attorney costs.

"It’s a political agenda against the franchisee’s resources," Sherwyn said.

The costs and potential liability have already begun to fray the relationship between franchisees and franchisors. Big companies are attempting to consolidate smaller franchisees that are not equipped to handle expensive litigation to avoid settlements and cases that could set a precedent that damages the model.

"Some franchisees that don’t have the resources … they’re effectively going to have to capitulate," Leon said.

Aggressive regulation and union pressure ends up favoring big businesses at the expense of smaller entrepreneurs.

"We’re going to turn franchising into franchisors and really big franchisees," Sherwyn said.

Aziz Hashim, a franchisee who owns Popeyes restaurants, said that overthrowing the franchise model threatens upward mobility.

"You can work at a widget factory for 40 years, but you’re probably not going to own the widget factory. You spend 40 years in franchising chances are you have the opportunity to own a business," he said. "The government … will hurt the people they claim to help."

This will have consequences for the economy as a whole. Franchisees employ more than 8 million workers and are expected to generate $880 billion in economic activity, according to International Franchise Association Chairman Melanie Bergeron.

"If our opponents are successful, that growth will surely slow," Bergeron said. "We need more help than ever to fight back."

Correction: This story originally gave Norman Leon's name as "Leon Norman."

Published under: Department of Labor, NLRB, SEIU, Unions