Expect More Friction and Higher Costs If Franchise Labor Change Goes Through

The relationship between franchisors and franchisees has been top of mind lately, thanks to the National Labor Relations Board’s recent efforts to update the joint-employer standard.

I don’t believe the change, which at the moment remains hung up in the courts, is just a small tweak to an inconsequential piece of legislation.

If it finally goes into effect, the update represents a drastic change that has the potential to shake up our entire industry, and not in a way that benefits franchisors or franchisees.

For context, I’ve spent much of my life building and selling successful franchise operations. My current endeavor, Best Option Restoration, takes home restoration and turns it into a top-notch, professional service.

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I’m not just sending a man in a van with a fan to go dry out someone’s flooded house. My team uses cutting-edge tech and focuses on looking and acting professionally. I like to tell people we’re the Neiman Marcus of home restoration.

You learn a lot when building franchises from the ground up, much of it through trial and error. When I was first starting out 17 years ago, the franchisor-franchisee relationship was a one-way street. The franchisor was like the Wizard of Oz — as a franchisee, you just did what he said and didn’t ask questions.

I gradually realized that franchisors can learn as much from franchisees as the franchisees can learn from them. Now, I listen more than I teach. I see myself as being in the business of helping people. I meet franchisees where they are and help them get where they want to be.

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You can’t have a successful franchise without a healthy franchisor-franchisee relationship. And you can’t have a healthy franchisor-franchisee relationship without a balance of power (and some give and take) between the two.

But the NLRB’s new rule expands what constitutes a “joint employer.” The previous 2020 definition said that a business could only be a joint employer if it exercised direct control over a worker’s terms and conditions of employment.

Under the old definition, a franchisor and a franchisee wouldn’t be joint employers of a worker.

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For example, if you work at a McDonald’s franchise, you’d be an employee of the franchisee. McDonald’s corporate (the franchisor) determines many of the rules the franchisee follows. But because the franchisor doesn’t actually directly supervise you, it’s not a joint employer.

Under the new definition, however, the franchisor is a joint employer if it reserves the right to exercise direct control over the terms and conditions of employment — even if it doesn’t actually exercise those rights.

McDonald’s corporate doesn’t routinely involve itself in hiring and firing. However, if you work at a McDonald’s and have several complaints against you and the franchise owner refuses to let you go, corporate can step in and fire you. Because the franchisor has that right, the franchisor and franchisee are joint employers.

This creates a problem for two reasons. Specifically, if a franchisor and franchisee are joint employers:

  1. They both must engage in collective bargaining with labor unions
  2. One can be legally liable for the other’s unfair labor practices

It might not seem like it at first, but these two problems are going to affect you, whether you’re a franchisor, franchisee, employee, or consumer.

Let’s look at the first point. Under the old rule, it was rare to see unionized workers in franchised businesses. But under the new rule, we’ll very likely see more unions. For U.S. businesses (across all sectors), the average hourly cost of a non-unionized worker is $40.27. For a unionized worker, it’s $56.13.

That’s a massive jump, and you’d be delusional to think any business could absorb the price difference without making some major changes. In most cases, those changes come in the form of a reduction in employee hours, an increase in prices, or both.

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Franchisors and franchisees get stuck battling financial stress (and paying legal fees to make sure they’re compliant with the new law), employees lose income (and possibly even employer-sponsored benefits) because their hours are slashed, and customers pay more. Everybody loses.

Now on to the second point. Under the old rule, franchisors generally weren’t legally liable if franchise owners engaged in illegal labor practices. Now, franchisors will need to keep a closer eye on franchisees to shield themselves from liability.

That’s going to be a costly endeavor for franchisors. And because closer supervision might make franchisees feel like they’re under a microscope, it also has the potential to strain franchisor-franchisee relationships.

Adding insult to injury is the fact that the new law is more ambiguous than it sounds.

The joint-employer definition may seem clear, but the NLRB says it will still evaluate businesses on a case-by-case basis to determine whether each one qualifies as a joint employer. This is a relatively uncharted legal territory, so we’ll likely see at least a handful of high-profile court cases in the not-so-distant future.

I don’t want to give the impression that the new joint-employer rule is an insurmountable challenge. Will it be damaging to our industry? Chances are good. Will it create a legal, financial, and logistical headache for us all? Absolutely.

Difficulties like this can be a catalyst for innovation. But it won’t be easy. No matter how you look at it, we’re in for a bumpy ride.

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