Entrepreneur | This New Government Rule Threatens to Disrupt the $825 Billion U.S. Franchise System

The NLRB’s new Joint Employer Rule redefines the franchisor-franchisee relationship, potentially shaking the foundation of a key system that contributes to the U.S. economy. Here’s how this significant change might alter the franchising landscape.

By Matthew Haller Edited by Carl Stoffers Nov 2, 2023
Entrepreneur

Opinions expressed by Entrepreneur contributors are their own.

“If it ain’t broke, don’t fix it.” Apparently, Washington never learned that timeless lesson. With so much that needs fixing in our country today, leave it to regulators to meddle with one of the few things working extremely well: the franchise system. A new rule issued this week by the National Labor Relations Board (NLRB) threatens to throw off franchising’s winning formula, which contributes $825 billion to our economy every year.

Franchising works by combining two powerful ingredients — successful brands and hometown entrepreneurs — into a system that benefits everyone: workers, consumers, communities, and our national economy. The NLRB’s new regulation changes how these two ingredients mix by making brands and owners jointly responsible for the same employees. Let’s look at the rule in greater depth to understand what it means and how it impacts franchisors and franchisees alike.

What is the rule?

Naming multiple entities employers of the same workers has significant — and confusing — implications for how labor laws are applied and how responsibilities are distributed. The NLRB’s rule change makes franchisors (the brand owners) jointly responsible for the labor practices of their franchisees, whereas previously the franchisees were responsible for compliance with labor laws related to their employees.

Let’s say you own a Coffee Stop restaurant. Until the NLRB’s rule passed this week, you were the sole employer of your workers. You decided when to hire them, how to structure their hours, how to manage them, and if and when to let them go. Most importantly, you solely shaped the employee culture of your Coffee Stop restaurant and created an environment to drive employee retention specific to your unique market. This localized, decentralized control is exactly what has made the franchise business model so successful.

When you own a franchise, you’re the boss. The NLRB’s new rule erodes that control. Now, Coffee Stop’s corporate office is deemed the joint employer with you, meaning it is equally responsible for your employees and will have no choice but to get more involved in your decisions as a business owner. This undermines your autonomy, creates a confusing environment for your workers, and causes a chilling effect on companies that might otherwise be eager to franchise their brands.

The risks at a glance

It’s difficult to overstate the threat this rule poses. Most immediately, the outcome will be an extraordinary increase in costs and legal risks. Franchisors will be liable for hundreds of thousands of workers currently employed by their franchisees. While many may think franchisors are large corporations, the reality is that most franchisors are small businesses too, seeking to become the next McDonald’s – in fact, of the more than 3,000 franchise brand companies operating in the U.S., only 2 percent of them (78 brands) have systemwide sales greater than $1 billion annually. The point is that it’s simply not feasible to transfer the more than eight million employees working for franchisee businesses to the balance sheets of 3,000 franchisors, but that’s exactly what the NLRB has done by government fiat.

To limit their liability, franchisors will be forced to undertake a variety of costly compliance measures. If the rule stands, they will be forced to exert control over how franchisees manage their day-to-day operations (an area of business operation historically left solely to franchisees). In the near term, as franchisors wait for the imminent flood of litigation to provide clarity to the NLRB’s ambiguous rule, franchisors are likely to “distance” themselves from their franchisees – which immediately adds new costs for franchisees in areas previously offset by franchisor investments. Franchisors may also increase fees to their franchisees to offset these higher costs.

We know the threat of higher costs is real because we watched it happen once before. A similar rule implemented between 2015 and 2017 led to a staggering $33 billion per year in extra operational costs for franchise businesses — not to mention a 93% increase in lawsuits.

New research from Oxford Economics shows that franchisees are bracing for more harm from the new NLRB rule: 70% of franchisees expected increased litigation and costs, and 66% of franchisee respondents expected the new standard to raise barriers to entry into franchising.

Undermining a winning formula

The NLRB’s rule interferes with the clarity of roles that underlie the franchising model’s success — those distinct, yet complementary parts that franchisees and franchisors play. By blurring these lines, it throws off the equilibrium of the system and undermines its appeal for all parties involved. Impeding the success of this system will naturally impose massive opportunity costs on everyone who benefits from franchising — in short, everyone.

Successful brands will be hurt by this rule by slowing their growth and preventing them from opening new locations, harming overall economic growth. The rule will hurt aspiring entrepreneurs who see franchising as their ticket to owning their own business — nearly one-third of business owners say they would not own a business without franchising, which is especially true for women, people of color, veterans, and first-time business owners. What’s more, around 26% of franchises are owned by people of color, compared with 17% of independent businesses.

This rule will also hurt the very workers it claims to help. Employees of franchise establishments may find that their hours are cut or their jobs are eliminated because their employers can’t afford the higher costs. This could require those workers to take less desirable jobs. According to research from Oxford, franchised businesses provide better wages, up to 3.4% higher, and more generous benefits than their non-franchised counterparts.

Finally, the rule will hurt consumers, because the costs will ultimately get passed on to them in the form of higher prices on goods and services. I can’t think of a worse time to raise prices on consumers than now, during stifling inflation.

The plan to stop it

Rest assured, the NLRB’s joint employer rule is a disaster, but it doesn’t have to be a permanent one. We, at the International Franchise Association, have been prepared for this moment for months. We saw it coming, organized and rallied everyone from franchisors to franchisees to members of Congress against it. We have a few arrows in our quiver.

First, there is the Save Local Business Act, legislation that will clarify the joint employer standard and protect the independence of local franchise businesses, introduced in the Senate by Sen. Roger Marshall (R-KS) and Rep. James Comer (R-KY).

Second, we are working with our allies in Congress to use their oversight of the regulatory state to revoke the harmful rule entirely. The Congressional Review Act of 1996 allows members of Congress to submit and vote upon a resolution of disapproval. If passed in both the House and Senate and signed by the president, the rule would be repealed. Immediately after the NLRB released their rule, Senators Joe Manchin (D-WV) and Bill Cassidy (R-LA), announced they would introduce a bipartisan challenge to the joint employer rule in the Senate.

Lastly, there is our greatest asset of all: You. The owners and franchisees who are out there every day working to keep their businesses humming. You know how much this rule will hurt, so we need you to speak up about it. Call your Senator. And give us a call so we can enlist your help with our efforts in Washington.

As franchisors and franchisees, you are serving much more than just your customers. You are driving your local and national economy. You are providing great jobs for your workers. You are bolstering the American Dream for the next generation of entrepreneurs.

Thanks to you, franchising is about as far from “broken” as any complex system can be. Together, let’s make sure Washington gets the message: Stop trying to fix us.

Matthew Haller is President & CEO of the International Franchise Association.