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The franchise business model, a successful method for entrepreneurs to start a business, is under attack. And small business franchise owners are paying the price with higher costs.
In 2015, the National Labor Relations Board (NLRB) upended decades of settled law by declaring franchisers—like McDonald’s—and franchisees to be “joint-employers” if the former has “indirect” control over a latters’ employees, such as a franchisee using workforce management software provided by the franchisor.
The change in the standard makes it easier for unions who have seen their membership numbers dwindle over the decades to organize franchise workers. It also makes franchisers more susceptible to local labor disputes. Trial lawyers like suing those with “deep pockets.”
Unfortunately small business owners are getting stuck with new costs [subscription required] as a result of the new standard, The Wall Street Journal reports:
Some say their franchisers have scaled back worker training tools and other guidance, fearing regulators would view such involvement as joint-employer-like control.
A home health-care business in Wisconsin is taking on $10,000 in annual recruiting costs because its franchiser stopped providing assistance to steer clear of regulators, and a small hotelier in Florida is abandoning expansion plans in small markets because one of its franchisers scaled back worker training it provides.
Shelly Sun, co-founder of BrightStar Care, a Chicago-based franchiser that provides home health-care services through its network of more than 300 franchisees, used to help the businesses talk through employment problems, such as difficult employees. Now, “we refer them to a human resources attorney,” she said.
Her company also stopped paying to host an online system where franchisees could post job openings and screen applicants, Ms. Sun said.
BrightStar franchisees Susan Rather and her husband Jeffrey Tews have since established their own system for $10,000 a year. “That sort of thing will impact the bottom line,” said Ms. Rather, who together with her husband owns four BrightStar home-care locations in Southern Wisconsin.
Higher costs mean less investment in the business, slower growth, and fewer jobs created.
As bad as these higher costs are, the joint-employer standard could also take away small business owners’ independence:
A printing business owner in Washington state said he canceled plans to open an eighth store because he doesn’t want to risk the investment until it is clear his franchiser wouldn’t be considered a joint-employer.
“I could lose my ability to control my business,” said Chuck Stempler, an owner of the seven printing stores that operate under the AlphaGraphics brand in Washington and California.
The whole reason entrepreneurs buy franchises is that they want to work for themselves. Franchising allows them to take a business plan that has worked elsewhere, invest their money and sweat-equity, and have a chance to thrive.
It’s the individual, independent franchisee in their local market making decisions about who to hire, what wages to pay, and under what work hours and working conditions. If a small business franchise owner wanted to be told how to run their business they wouldn’t have gotten into franchising in the first place.
Franchising accounts for 5.6% of the economy, supports 9.1 million jobs, and has improved peoples’ lives. But undercutting a successful business model (as a gift to union organizers) is foolish because it cuts off a proven path to success.
As Amir Siddiqi, a Pakistani immigrant who owns 38 Carl’s Jr. stores, wrote in 2015:
Forcing franchisers to worry about their franchisees’ employees would destroy the business model I signed up for. It could also destroy a road to the American dream for people who are willing to take some risks for the chance to build a business and a better life.