One government lawyer’s war on the franchising business

Imagine you’re a small business owner trying to build security for your family, create jobs in your community and make a profit. You control the price of your products or services. You control your expenses like rent and labor. You hire and fire your employees, encourage or discipline them, and set their salaries and benefits. With a lot of hard work and care, your business is doing fine. Suddenly, you’re told that an unelected bureaucrat in Washington D.C. has decided you’re no longer in charge of your employees. You’re now a joint employer with a distant corporation that knows little about your individual business or your community and will suffer little, if any, economic detriment should your profits decrease rather than increase. It may sound like this could only happen in France or Greece but, for America’s franchisees, it’s happening here and now.

Franchising has been a great way to own a piece of the American Dream. The number of small business owners that exist because of the business model exceeds 770,000. And they’re not all fast food restaurants. Avis, Circle K, Great Clips, and Hilton Hotels – all are franchises. The business model accounts for 18 million direct and indirect jobs and adds $2 trillion to the GDP.

Franchising works because it allows ordinary Americans to go into business for themselves, but not by themselves. The franchisor provides branding and marketing support in exchange for a licensing fee and upfront investment. The franchisees own and run their own stores, establishing operations and employment practices.

And it’s all in jeopardy thanks to Richard Griffin, the National Labor Relations Board’s general counsel, who decided last summer that the decades-old rules of franchising law no longer apply, that franchisors are “joint employers” and can be held liable for the employment decisions of individual franchisees. In December, he issued complaints naming McDonald’s Corp. as a “joint employer” of workers at its franchisees.

Why the sudden change? Had the franchising business changed? No. Richard Griffin, it turns out, is trying to change the franchising business. And franchisors and franchisees across America are mad and scared. “It’s a hand grenade in the middle of the business model,” Bill Bass, a franchisee with Two Men and a Truck told Entrepreneur. “It would change everything to the point where we probably wouldn’t be in franchising.”

The reason is simple. Making franchisers joint-employers kills all incentives to franchise. Why would a corporation choose to franchise if the legal liabilities are the same as owning? And why would franchisees assume a 100% equity stake in a business that they don’t control?

It isn’t just the business that’s under attack. “This legal opinion would upend years of legal precedent and threaten the sanctity of hundreds of thousands of contracts between franchisees and franchisors,” said Steve Caldeira, chief executive of the International Franchise Association.

“If the NLRB’s new interpretation of the rules becomes the law of the land, it will be tantamount to rewriting an existing contractual relationship by government fiat in ways the parties never contemplated and to their mutual detriment,” Andy Puzder, CEO of CKE Restaurants wrote in the Wall Street Journal recently. But contract and precedent don’t matter to the NLRB’s top lawyer.

Not everyone is unhappy with Griffin’s decision. This past month, ten former restaurant workers sued McDonald’s Corp. along with one of its franchisees for alleged wrongful termination in a move that tests Griffin’s new standard. More lawsuits are coming because the prospect of punishing a deep-pocketed corporate parent for the actions of an individual franchisee is a business opportunity for trial lawyers working on juicy fees.

Unions are also thrilled. “Today’s decision by the NLRB’s general counsel shows that McDonald’s can no longer hide behind franchisees for illegal treatment of workers,” Kendall Fells, director of Fast Food Forward, told reporters. And who’s behind Fells’ group? The Service Employees International Union.

It’s no accident that Griffin has deep ties with unions. He served on the board of directors for the AFL-CIO Lawyers Coordinating Committee, and was general counsel to the International Union of Operating Engineers.

Who will suffer the most from Griffin’s ruling? Small business owners, including over 200,000 minority-owned franchises who put minority employees in minority communities to work. Like Daljit Hundal, who started at Carl’s Jr. when he was 19, and now owns more than a dozen restaurants. “With the NLRB’s ruling, I don’t see the point of becoming a franchisee. It turns me into an employee,” Hundal explained.

And customers too will lose. They’ll be the ones paying for the increased costs of doing business in the form of higher food prices if the NLRB ruling becomes the law of the land.

There’s help on the way. Republican Sens. Mitch McConnell (Ky.) and Lamar Alexander (Tenn.) introduced a bill that would restructure the NLRB, and reign in the potential for partisanship on the labor and business fronts. It would add a sixth board member and require a balance consisting of three Republicans and three Democrats.

“It will change the NLRB from an advocate to an umpire,” Alexander explained.

A few weeks ago the US Senate’s Health, Education, Labor and Pensions Committee (HELP) held a hearing called “Who’s the Boss – The Joint Employer Standard and Business Ownership.” Sen. Johnny Isakson (R-Ga.), who chairs the subcommittee, voiced concern that one unelected lawyer could alter a business that impacts so many lives. “If somebody wants to make a change, you ought to do it through the debate process and the congressional process, not through an attorney at the NLRB.”

When that debate happens, two questions need to be answered. Who’s Richard Griffin’s boss? And the NLRB’s?

Marcus is a co-founder of both The Home Depot and the Job Creators Network.