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The Changing Franchisor-Franchisee Relationship with Insight from Paul Segreto

EDITOR NOTE: This post was published before California Governor Jerry Brown vetoed SB 610 on September 29 stating the bill would "[alter] the relationship between franchisors and franchisees."


The relationship between franchisors and franchisees has traditionally been a hierarchical one with franchisors firmly planted at the top. But as in life, nothing stays the same forever. Over the past few years, there has been a dramatic shift in the balance of power.


In particular, the summer of 2014 saw two major judgments that underscored the changing times. While these two rulings address different parts of franchise operation, they both serve as actions seeking to level the balance of power between the franchisor and the franchisee.


Are Franchise Corporate Offices Liable Too?

Since 2012, unionized McDonald’s workers have filed over 180 complaints to the National Labor Relations Board (NLRB) covering a number of working conditions they felt weren’t adequate. On July 29, the NLRB struck a potentially huge blow to the traditional franchise model in response. The top prosecutor for the NLRB rejected the claim of fast food giant McDonald’s, which had claimed it was not liable for the management conditions of workers in franchised outlets.


The ruling meant that McDonald’s corporate could be held as a defendant to the charges, as a joint employer alongside the franchisees that run the restaurants, in the 43 complaints that were accepted. By indicating McDonald’s corporate has a shared responsibility in the treatment of workers, the rulings from the NLRB – and Canadian authorities that echo the decision – could endanger the “in business for yourself, but not by yourself” mantra of franchising completely.


Traditionally, when a franchisor enters into a franchise agreement with a franchisee it is assumed that it is the responsibility of the franchisee to run the business up to the laws and regulations of his/her area, as well as keep its employees happy. A pre-established business model and support from the franchisor is utilized by franchisees, but, for the most part, the company is theirs to operate in good times and in bad. The July 2014 NLRB decision may lead to franchisors becoming more involved in the day-to-day running of their franchisees’ business in order to avoid potential troubles, essentially making franchisees more of a manager than a business owner.


But because a national body thinks that corporate franchise entities should also be culpable for conditions at individual franchise locations, it doesn’t mean all governing bodies believe they should be held liable for all things that take place at their individual outlets. In late August, the California Supreme Court ruled that Domino’s Pizza doesn’t have to face a jury in a case of alleged harassment by a supervisor at one of its locations.


Legal Books


Making It Harder to Terminate Agreements

California has been a hotbed of franchise activity lately. On August 14, the California State Assembly passed a bill that expanded franchisee rights towards the franchisor. (Note: the bill is still pending Governor Jerry Brown’s signature – decision expected at the end of September.)


According to Entrepreneur Magazine, the main intent of the bill is to protect franchisees from “churning.” Churning is a word used to describe the practice by which some franchisors have terminated a franchisee’s franchise agreement, without a substantial breach of contract, in order to resell the location and make more money off the charging of new franchise fees. The SB 610 bill will supposedly make it significantly more difficult for a franchisor to terminate a franchise agreement with a franchisee.


Opponents of the bill, including several franchisors and the International Franchise Association (IFA), claim if SB 610 is signed into law it will make it harder on franchisors to maintain their brand reputation by restricting their ability to terminate franchisees with whom they’ve had a relationship go bad with. Other opponents have questioned the need for the bill in its entirety, stating that SB 610 doesn’t add to the protections franchisees already have established for them in California’s state legal system.

Shifting Leadership Perspectives

Current IFA treasurer Aziz Hashim, who will become IFA chairman in 2016, is very pro-​franchisee. Hashim believes the relationship of franchisors and franchisees should be one of partnership. In fact, he hasn't shied away from voicing criticisms of franchisors who don't treat their franchisees as partners. He is on the record as saying, “I think the industry needs to take a stronger look at the wisdom and talent of franchisees and use that.”


His voice is respected in the franchise world. According to him, representatives from franchise brands visit his company’s headquarters regularly to solicit his advice about how to attract multi-unit franchisees. Why? Hashim is a very successful multi-unit franchisee through his ownership and CEO status at NRD Holdings, which owns over 60 franchise units of differing brands.


Hashim’s dedication to elevating the profile of franchisees is leading him to literally put his money where his mouth is. He is selling off his stake in the franchises he owns and launching a private equity fund with the purpose of leveraging the power of multi-unit franchisees. The goal is for multi-unit franchise operators to invest money in franchise systems that have potential for success, but need a helping hand. In turn, those franchises will be advised by franchisees that know from experience what they need to be successful.


In an August 2014 interview with Franchise Times, Hashim said about the launch of his private equity fund, “Franchisees have not participated in the financial upside of the franchisor. Why shouldn’t we have a piece of that upside, in something we’ve helped to create?” 


Commentary from an Industry Expert

A noted franchise industry expert and speaker, Paul R. Segreto, CFE, was nice enough to answer some questions for Franchise Direct about the legal fight the franchising industry is enduring. Paul is a current member of the IFA Franchise Relations Committee. In addition, Paul is currently the CEO of Franchise Foundry, a franchise development company, as well as the host of Franchise Today on Blog Talk Radio. You can find out more about Paul here.


What will be the main points of discussion at the IFA Public Affairs Conference (September 16-17 in Washington, D.C.)?

The Public Affairs Conference is the best opportunity for IFA members to advocate for their business and communicate to lawmakers the challenges we are facing. In July, the National Labor Relations Board (NLRB) Division of Advice announced that a franchisor could be designated as a joint employer of its franchisees employees. The IFA is fighting this dangerous assertion because it is unlawful and will harm job growth, the economy and locally-owned franchise small businesses in every state. Franchisees have invested their capital in the business and stand to lose equity in their businesses if their franchisors are deemed joint employers. During the Conference, IFA members will take this message to Capitol Hill to fight for franchising and educate those on the success of the franchise business model and the growth that it continues to provide to our economy. 

Paul Segreto Headshot


What is the risk to the industry from some of these judgments that have been handed down?

If franchisors are joint employers with their franchisees, these thousands of small business owners would lose control of the operations and equity they worked so hard to build. The jobs of millions of workers would be placed in jeopardy and the value of the businesses that employ them would be deflated.


This recommendation is a drastic and overreaching solution. Ample federal, state and local remedies are available – and are regularly used to enforce current law, including more limited NLRB action, state attorneys, general action and private rights of action – to deal with labor violations of various kinds. Destroying the fundamental tenets of the franchise model would eviscerate the most successful business model in existence.

Why do you believe so many cities and states are reviewing their franchising policies?

The Service Employees International Union (SEIU) is leading organized attacks against franchising and these jobs they create. The labor unions multi-pronged attack at the local, state and national levels, including having the federal government declare entire franchise systems as a single unit rather than the collection of separate, small business owners they actually are. The SEIU wants to undermine the franchise business model so they can more easily unionize entire franchise systems, as it is much more difficult for unions to organize thousands of independent small businesses under the current regulatory system. 


What specific actions are the IFA taking, or considering, to protect the rights of both franchisors and franchisees?

With our continued fight to defend the franchise business model, the IFA is ensuring that franchise small business owners are well informed of policies that could alter the way they do business so they are armed with the tools necessary to educate lawmakers. The IFA’s Franchise Action Network is a new strategic initiative that mobilizes franchisors, franchisees and suppliers at the grassroots level. A coalition of the franchise owners, all promoting a single mission, is the best way to protect our industry from an increasingly hostile legislative and regulatory environment at the federal, state and municipal levels. 


How does Aziz Hashim’s ascension to chairman underscore the changing relationship climate between franchisors and franchisees?

Aziz is going to elevate the role of franchisees in everything IFA does. The nature of the game has changed. There has been no more important time for franchisees to be engaged with the IFA on public policy issues. Legislators need to hear the concerns these business owners have about policies that impact their relationship with their franchisor.

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