An NLRB ruling could take down an engine of economic growth
Dawn Lafreeda began working at Denny’s when she was 16, making her way up from hostess to waitress. In 1984, at the age of 23, she bought her first store. She now owns over 70.
“When I was a kid, I told myself that I was going to be self-employed when I grew up and have a better life and have the things I’d never had,” she told Entrepreneur magazine this past summer. Franchising was Dawn’s ticket to a better life. She’s not alone.
Franchising has been a successful business model for Americans wanting to own their own businesses and a piece of the American Dream. At last count, their number exceeded 750,000 small-business owners. Franchising touches not just the fast-food industry, but every aspect of American life: AAMCO and Anytime Fitness, Century 21 Real Estate and Curves for Women, H&R Block and Hilton Hotels, Merry Maids and Molly Maids, Supercuts and Snap-on Tools, U-Haul and The UPS Store and Visiting Angels — all are franchises.
What’s made franchising so successful is the business model itself. It allows ordinary folks to go into business for themselves, but not by themselves. The franchisor provides branding and marketing support, and the individual entrepreneurs, known as franchisees, own and run their own stores. They establish day-to-day operations and employment practices, hire and fire employees, and set wages, benefits, and work schedules. And they pay their own taxes.
All of that is now in jeopardy, thanks to one government lawyer in Washington, D.C. The National Labor Relations Board’s general counsel decided earlier this year that the decades-old rules of franchising law no longer apply — that franchisors are “joint employers” and can thus be held liable for the employment decisions of individual franchisees.
The decision came in response to complaints alleging that McDonald’s and its franchisees had violated the rights of employees involved in protests against the company, but the decision has the potential to disrupt the entire franchising business model.
Just talk to Bill Bass, a franchisee with Two Men and a Truck.
“This joint employee-employer thing, if that goes through, that’s a hand grenade in the middle of the franchising business model,” Bass told Entrepreneur shortly after he learned of the NLRB ruling. “It would completely change everything about the franchising model, to the point where we probably wouldn’t be in franchising.”
It isn’t just the business model that’s under attack, but the hundreds of thousands of contracts that make the model hum. But contract law doesn’t seem to be of much interest to the NLRB’s chief lawyer.
“This legal opinion would upend years of federal and state 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.
But not everyone is unhappy with the NLRB ruling. Kendall Fells, organizing director of Fast Food Forward, was thrilled with the decision. “As the federal government’s determination shows, McDonald’s clearly uses its vast powers to control franchisees in just about every way possible,” he told the Wall Street Journal.
And who exactly is behind Fast Food Forward? The Service Employees International Union, of course — the group that has been staging demonstrations against McDonald’s and other fast-food franchises for more than two years, demanding higher wages and the right to organize their workers.
And that’s what the latest missive from the NLRB is all about: making it easier for labor unions to turn hundreds of thousands of individually owned small businesses into one giant union hall — and making it easier for trial lawyers to sue the deep-pocketed parent company for the mistakes of individual owners.
That’s good news for the union bosses and trial lawyers, but bad news for franchisors, franchisees, and a big chunk of the American economy.
Franchising supports over 18 million U.S. jobs and adds more than $2 trillion to the national economy. Millions of jobs would be put at risk by this ruling, and the value of hundreds of thousands of small businesses could potentially be harmed.
Who will suffer the most? The little guy and gal, including over 200,000 minority-owned franchises. One out of every five franchise owners is a member of a racial minority, employing many more minority employees and often doing that employing in minority communities.
Daljit Hundal is one example. His family moved from India to England when he was seven years old. When he started to think about college, a family friend in California recommended he come there, and so he did, starting at a junior college and eventually transferring to Fresno State.
To help pay the bills, Daljit took one of those dead-end, minimum-wage jobs we always hear about in the media. Only that dead-end job turned into a career.
He started as a part-time cook at Carl’s Jr. when he was 19, but it didn’t take long for him to be selected for a training program for a management position, which paid over $1,000 a month — good money back in the days when he started.
“I worked my way up from shift manager, to assistant manager, to sole general manager, two years later was promoted to district manager, and three years later became regional vice president at age 26,” he explains.
When the corporation started to struggle, Carl’s Jr. sold the stores Daljit was overseeing to franchisees. He was out of a job, but not for long. After six months on the unemployment rolls, Daljit put together the cash — including money from his in-laws — to purchase his first franchise from the corporation that only months before had laid him off. He now owns more than a dozen Carl’s Jr. restaurants, and a bunch of Jamba Juice stores too.
“With the NLRB’s ruling, I don’t see the point of someone becoming a franchisee,” Daljit says.
But Daljit wasn’t finished, explaining the real reasons behind the success of the franchising model. The first has to do with the top-up success it engenders. “With this decision, corporations will have to enforce more of their corporate culture on franchisees, but it is franchisees who do a much better job of instilling a positive culture,” he says. “Just look at the government handing down something from atop, it doesn’t work.”
The second reason was even more important. “The individual franchisees have flexibility to meet the needs of our employees; a big corporation does not,” Daljit notes. “We have a program to provide our employees loans when they need them, but with a big corporation you don’t see that. We have benefits that we tailor to meet the needs of our managers, and our benefits are better than corporations offer.”
Last but not least, Daljit talked about the impact of his workers’ being unionized, and the impact on his business. “The amount you would have to raise food prices to meet the increased costs is staggering, and if you have the stores on the threshold of being barely profitable, higher prices will definitely lead it to lose customers and money, forcing the franchise to shut down.”
Daljit wasn’t finished, saving his most cutting observation for the NLRB — and the people who run Fast Food Forward — for last: “You will be hurting the very people you say you want to help.”
Words of wisdom from the trenches of America’s small-business community.
If politicians who care about free enterprise would only have the wisdom to tell the real-life stories of women owners like Dawn Lafreeda and minority owners like Daljit Hundal, they just might attract more voters.
— Lee Habeeb is the vice president of content at Salem Radio Network. He lives in Oxford, Miss., with his wife, Valerie, and daughter, Reagan. Mike Leven is the president and COO of the Las Vegas Sands and a member of the Job Creators Network.