Over the past year, franchise regulations evolved around the world. Here's a deeper look at franchise regulation developments in the United States and Europe.
U.S. Government Agencies Continue Examination of the Franchising Model
“One of the biggest misconceptions is that someone in your community who owns a franchise is not a small, local business owner, when in reality, that’s exactly what they are.” Matt Haller, senior vice president of the International Franchise Association (IFA)
The quote above encapsulates the year 2016 for the IFA and proponents of the franchising model – a push to re-educate, or in some cases educate, the general public about the nuts and bolts of franchising.
The fuel driving this push is a number of rulings and inquiries about how involved franchisors in the day-to-day dealings of their franchisees. Last year in our “Looking Forward” section of the Top 100 report, we noted the most prominent of them – the expected ruling in the joint employer appeal case involving McDonald’s.
In August 2015, the NLRB passed a ruling (combining the McDonald’s case with a similar one involving Browning Ferris Industries) that expanded its joint-employer standard, potentially putting franchise headquarters on the hook for working conditions at an individual’s franchise location. The board ruled a company can be considered a joint-employer if it exercises any control over working conditions or if it reserves the authority to do so. Previously, the standard for joint-employer was “direct and immediate” control.
Immediately after the ruling, franchise industry leaders sprang into action denouncing the decisions and taking actions to fight what they perceive to be an attack on the franchising model. The IFA has been very actively politically, lobbying and backing potential legislation such as the Protecting Local Business Opportunity Act.
In addition, since the NLRB ruling, about a dozen states have passed their own measures clarifying the franchisor-franchisee relationship. Fortunately for pro-franchisee groups, many of these measures are being used to maintain the independence of local franchisees. For example, laws in both Wisconsin and Utah exclude the franchisor as the employer of either a franchisee or a franchisee’s workers.
As of now, the NLRB ruling is still under appeal. Both McDonald’s and Browning Ferris have alleged the proposed shift in joint employer status is too broad and vague thus rendering it not practical.
It should be noted, other agencies have noted the fuss around franchising and have conducted their own inquiries into the franchising model as well.
Shortly after the NLRB ruling, OSHA (the Occupational Safety and Health Administration) initiated a document request reminiscent of the one the NLRB made in its initial investigation, and has indicated it wants to follow the NLRB’s lead in expanding the scope of joint employment.
In addition, the SBA (Small Business Administration) sought clarification on the franchisor-franchisee relationship in early 2015. In late 2016, the SBA released an addendum for its franchise program, which went into effect at the beginning of 2017.
The outcome for many of these inquiries and cases will be significantly dependent upon the direction the new administration takes, especially the incoming Labor Secretary. And, initially, with the nomination of Hardee’s (#57) and Carl’s Jr. (#65) CEO Andy Puzder, the interests of franchisors appeared like they would be very well represented. However, the nomination hit a snag in February when several senators urged the White House to withdraw Puzder’s nomination for a number of factors. Puzder went on to withdraw himself from consideration on February 15.
For more details, please see our full post on government inquiries into U.S. franchising.
The European Parliament Wants Better Franchising Regulation in the EU
Across the pond, there’s a groundswell effort to create a better regulatory environment for franchising in the European Union (EU).
In a study released in October 2016, the European Parliament remarked, “[franchising] has great potential to stimulate economic activity within the EU, [but] it can do this by improving the distribution of goods and/or services within and between member states [or countries].” The study references “two distinct types of franchise regulation” that keep franchising from flourishing in Europe like it could.
The first of these regulations are competition laws. Competition laws are essentially anti-trust laws governing policies such as resale price maintenance (e.g. a franchisor directly establishing a franchisee’s resale price or enforcing a maximum discount level).
Within the study, the European Parliament expresses the belief that these laws don’t take into account the structure of franchising. It’s similar to the concerns referenced earlier in the previous section with U.S. government agencies exploring about whether or not franchisees are indeed small to medium business owners, instead of simply an offshoot of the larger franchisor.
In the study, researchers found that in trying to control big business, competition laws “cannot see the macro-economic wood for the anti-trust trees,” disabling individual franchise units and their franchisees from being able to compete the big businesses.
The second set of regulations referenced in the study are the various regulations of EU member countries governing the relationship between franchisors and franchisees.
There are franchise-specific disclosure laws in less than 10 EU member countries. Researchers found that “the lack of any uniform approach to pre-contractual [franchise] disclosure weakens the impact of franchise-specific laws…Each member state takes a different approach to [franchise-specific] issues in the lack of any homogeneous approach. This in turn substantially weakens their impact upon cross-border franchising within the EU and creates a technical barrier to franchising between EU member states.”
The study also highlighted the lack of impact franchise associations are currently having in Europe as an obstacle to franchise growth, citing the fact many EU member countries don’t have a franchise association and “some of those that do exist are weak and under resourced.”
The study concluded by outlining a potential solution: a “European Legal Act” to bring a unified approach to franchising regulation in the European Union.
For more on the study and the proposed solution, please see this post.