The U.S. National Labor Relations Board‘s proposed expanded Joint Employer Rule could transform the relationship between franchisors and franchisees, potentially revolutionizing the franchise business model as we know it.
While the rule aims to protect workers’ rights and ensure fair labor practices, it also brings several formidable challenges for franchise owners.
Where the rule stands
Although the expanded Joint Employer Rule has been blocked for now, it still poses a potential threat to the franchise industry. Franchise owners must remain vigilant and prepared for the possibility of its revival via an appeals court.
Attorney Jim Paretti of labor relations law firm Littler Mendelson told Entrepreneur earlier this year what he though the industry would look like with this expanded rule in place.
“If I’m a national franchisor, I have two options,” Paretti said. “One is to completely back off as far as I possibly can — which really is the opposite of what you want from a franchisor — leaving the franchisees in the lurch. Or, alternately, I am going to come down with a hammer. If any amount of control is going to make me liable, then I’m going to exert a lot of control over each franchise.”
This would essentially turn former franchise owners into glorified managers. “That’s not what anybody signed up for when they bought a franchise,” Paretti said.
The long-term effects on the franchise industry and the broader economy remain uncertain, but franchise owners must navigate these potential changes carefully to sustain and grow their businesses in this evolving landscape. Here’s a closer look at ways this proposed rule could impact franchises.
Increased liability for franchisors
The proposed rule could hold franchisors accountable for labor violations committed by their franchisees. This heightened liability means franchisors might face lawsuits and penalties for actions beyond their direct control. Such legal risks could deter franchisors from expanding their networks or investing in new franchises, ultimately hampering growth and innovation.
Related: Decoding the Massive Impact of the NLRB’s Joint Employer Rule
Higher compliance costs
With the threat of increased liability, franchisors will likely need to ramp up oversight and compliance measures. This could involve regular audits, comprehensive training programs and meticulous record-keeping. These necessary steps come with hefty costs, potentially passed down to franchisees or reflected in higher initial fees for new franchisees.
Reduced autonomy for franchisees
To avoid being classified as joint employers, franchisors might enforce stricter controls over franchisee operations. This could mean standardized hiring practices, mandatory training programs, and uniform labor policies. Such stringent controls diminish franchisees’ autonomy, limiting their ability to adapt to local markets and potentially stifling innovation and local responsiveness.
Increased operational costs
Franchisees might face soaring operational costs due to the implementation of standardized labor policies and compliance requirements. These additional expenses could include administrative burdens, increased payroll costs, and the need for legal counsel to navigate the new regulations. Rising operational costs could erode profit margins, making it tougher for franchisees to sustain their businesses.
Barrier to entry for new franchisees
The proposed rule could create a more challenging landscape for aspiring franchisees. The increased legal and compliance risks, along with higher initial costs, may discourage individuals from investing in franchises. This could stifle opportunities for entrepreneurship and slow the overall growth of the franchise sector.
Related: The Joint Employer Rule Will Crush Franchising. Here’s How to Protect Your Business
Impact on franchise relationships
The dynamic between franchisors and franchisees could become strained under the new rule. Franchisees might resent increased oversight and the loss of autonomy, while franchisors could struggle with the added burden of ensuring compliance. This strain could lead to conflicts and a weakened franchise network, potentially impacting overall brand strength and cohesiveness.
Broader economic ramifications
The broader economic implications of the proposed rule are significant. Franchises play a crucial role in the economy by creating jobs and driving local economic growth. Increased costs, reduced expansion, and potential closures due to the new rule could result in job losses and decreased economic activity. The negative impact on the franchise sector could ripple through suppliers, landlords, and other businesses that rely on a thriving franchise industry.
Related: This New Rule Could Disrupt the $825 Billion Franchise System
The bottom line
While the proposed Joint Employer Rule aims to protect workers and promote fair labor practices, it presents considerable challenges for franchise owners. Increased liability, higher compliance costs, reduced autonomy, and potential economic ripple effects are just a few ways franchises could be impacted.
The long-term effects on the franchise industry and the broader economy remain uncertain, but franchise owners must navigate these changes carefully to sustain and grow their businesses in this evolving landscape.
