Franchises could face bumpy ride

Note: A significant ruling in Patterson v. Domino’s Pizza by the California Supreme Court found that unless franchisors exert workplace control they are not responsible for the workplace policies of their franchisees and do not share liability in workplace-related lawsuits filed by employees of local franchise operations. This ruling does not directly affect other states or the National Labor Relations Board.

Notice to current and wannabe entrepreneurs: Big time changes may be coming. And, in the words of actress Bette Davis, “Fasten your seatbelts. It’s going to be a bumpy night.”

Ms. Davis’s famous line is from a movie called, “All About Eve” and the night’s bumpiness was coming from her guests’ stormy dialogue.

For today’s entrepreneurs, the bumpiness is coming from a legal action by the federal government.

The National Labor Relations Board (NLRB) is claiming that McDonald’s, as a franchisor, is a “joint employer” with its franchise owners in localities throughout the United States. This legal view, if upheld in court, would change the economic structure and very nature of franchising.

It is not certain that the courts will see things the NLRB’s way. In earlier court rulings, and even NLRB’s own rules, there are strong precedents for just the opposite view — that franchisors are not joint employers unless they make a distinct effort to be so. Still, it would be unwise to underestimate the skill and, most importantly, the persistence of a government agency like the NLRB to pursue its case.

If the NLRB’s view were to prevail against McDonald’s one significant change is that it would open up the cash drawers of franchisors to litigants — current or former employees of local franchises that have any sort of beef with their local manager.

Currently, those disputes have to be settled locally with the local franchise owner, who is the legal employer.

This usually makes the potential payoff of a lawsuit too small to attract big-league attention.

If the courts redefine McDonald’s legal standing as a franchisor to include being a joint employer with its more than 3,000 U.S. franchisees, who operate over 11,000 restaurants in the U.S., it will change the foundation of the company and its business strategy.

Moreover, it will do the same thing to every one of the franchise-based businesses in America.

McDonald’s has long been a target of labor union advocates. Its size and role in creating the fast-food business has made it an industry leader, and its active anti-union stance has made it organized labor’s nemesis.

Now that labor unions have the dominant voice at the NLRB, McDonald’s provided the opportunity to raise the level of conflict — translation: the Golden Arches were Target No. 1.

There’s a lot more at stake than litigating workplace disputes at McDonald’s.

In 2007, the Census Bureau reported that more than 10 percent of businesses in the U.S. were franchises.

At that time franchises produced $7.7 trillion in total sales and employed 7.9 million workers, more than 13 percent of our country’s total workforce. It is a major part of our economy, and certainly not an economic structure to play around with heedlessly.

All businesses are built around the skills, habits, costs, and availability of their workforces.

Franchises, especially food service and other hospitality businesses, have organizational structures built on entry-level workforce members.

Employment in these franchises opened the door to the workforce for millions of people, providing wages and work experience for young people, recent immigrants, and late-entry workers.

There are very few career-level or lifetime jobs in these industries, but a remarkable number of today’s top executives in large corporations got their first paychecks from a food-service franchise.

All that will change if the NLRB ruling stands. Turning franchisors into joint-employers could create many opportunities for organized labor.

But because the idea of entry-level labor being a stepping stone rather than a permanent position is inimical to the seniority concept behind organized labor, there would not be room enough for both in the new franchising structure.

Even if the NLRB ruling doesn’t produce a wave of unionization it will increase the costs for franchisees and for customers.

The costs of litigating workplace disputes will be distributed to all franchises and, ultimately, be passed on to those who purchase products or services from them. Translation: Be prepared to pay more for your sandwich or hamburger.

The NLRB ruling might also cause individual franchises to be caught up in the Affordable Care Act, known as Obamacare, with the result that even the smallest franchise operations will have to absorb the costs of medical insurance coverage into the price of your meal or your oil change.

It will take a while for this legal issue to sort itself out but anyone considering going into business as a franchise owner should consider its possibilities when calculating and forecasting margins, capital requirements, and profits.

It’s going to make a big difference.