How This New Government Ruling Destroys the Franchise Business Model

James Sherk / @JamesBSherk / August 28, 2015 

Signs for an assortment of fast food franchises located in one storefront in New York (Photo: Richard B. Levine/Newscom)

Commentary By

James Sherk @JamesBSherk

As a research fellow in labor economics at The Heritage Foundation, James Sherk researches ways to promote competition and mobility in the workforce rather than erect barriers that prevent workers from getting ahead. Read his research.

The National Labor Relations Board (NLRB) just issued a ruling likely to destroy the franchise business model.
To understand how far-reaching this could be, it should be noted that almost 9 million Americans work at over 780,000 franchised businesses.
From Jiffy Lube to Terminex to Wendy’s, franchises enable many Americans to run their own small businesses without having to design and market everything from scratch. Franchising is a particularly important opportunity for minority entrepreneurs.
Franchises are almost 50 percent more likely to be minority-owned than non-franchised businesses. If this ruling stands, minority Americans won’t get that chance.

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The recent ruling will probably force local franchises to give up total control of day-to-day business decisions to their corporate sponsors, turning thousands of investor entrepreneurs who currently own and manage a local business into middle managers in a giant corporate entity.
Until now, the NLRB has always defined an employer as the firm that hires, fires, pays wages, disciplines, promotes, and makes work assignments. That’s just common sense and comports with most Americans’ understanding of whom they work for.
The NRLB is now saying that companies that contract with others firms for services or set quality standards in exchange for brand licensing implicitly influence the other firms’ employees and should be required to bargain collectively with them.
If allowed to stand, this new interpretation will effectively destroy the franchise model of business.
How Franchises Work
Franchised businesses typically work like this. Corporate brands develop and market products, like Taco Bell’s Fiery Doritos Locos Tacos. The corporation licenses the right to sell those products to franchisees. In fact, 85 percent of Taco Bells are locally owned small businesses, not corporate-run stores.
In exchange for the benefit from the brand’s marketing and product development efforts, the franchise agrees to meet price, quality, and service standards. Anyone going to a Taco Bell franchise across the country knows what the food will taste like and about how much it costs. But the local businesses decide how to meet these standards. They decide whom to hire, what those employees will do, and how much to pay them.
The corporate brand doesn’t employ the workers or control the job. Yesterday, the NLRB decided it actually does both.
Overturning decades of precedent, the Board held that anyone who exercises direct or indirect control over employment conditions, or has the potential to exercise such control, jointly employs workers along with his main employer. Because the corporate brand sets price and quality standards it potentially “indirectly” controls working conditions. Hence, the corporate brand will, in the future, be required to bargain with a union representing the franchise’s employees.
The Goal Is to Unionize Franchise Employees
The slim NLRB majority that imposed this decision in a party-line vote appears to hope that it will aid union organizing efforts.
Unions have largely failed to organize franchise employees. They have not persuaded the workers that the benefits of union representation outweigh the cost of union dues. Now they hope to be able to organize from the top down, pressuring large corporate management through public relations campaigns to accept unionization without having to go to the trouble of actually convincing workers that it will be to their benefit.
In fact, such “corporate campaigns” have become a major unionizing tactic. As United Food and Commercial Workers Secretary/Treasurer Joe Crump explained:

Who do we really need to convince of the advantages of being union? Employees or employers? … Organizing without the NLRB [secret ballot elections] means putting enough pressure on employers, costing them enough time, energy and money to either eliminate them or get them to surrender to the union.

Unions have waged a public relations campaign against McDonald’s.
Organizers of the “Fight for $15” have confessed to reporters that the main goal is to unionize the company.
However, getting a corporate brand “to surrender to the union” is not enough. Until now, the brand had no role in unionizing elections. Moreover, franchise contracts typically run for decades. The corporate brand cannot just insert new requirements. It can at most suggest to its franchises that they disavow a secret ballot election—a suggestion they would likely reject.
The Board’s ruling making corporate brands co-employers changes that. The corporate brand can recognize the union without a secret ballot election, even if the franchisee does not. The ruling will make anti-corporate campaigns a lot easier in franchised businesses.
The ruling comes at the cost of blowing up the franchise business model. If the NLRB holds corporate brands legally responsible for their franchisees’ employment decisions, they need to control those actions. They cannot leave themselves liable for unfair labor practice violations someone else committed. The most likely result is that corporate brands will simply stop franchising and run all stores directly themselves.
That would facilitate union organizing, but it would also shut off access to the American dream.