United States | Franchisees in revolt against franchisors

When you walk into a McDonald’s, Mr. Lube, or Hilton, you think you’re visiting just one business. You are actually visiting two: the local operator of the establishment, the franchisee; and the big business that owns the establishment’s brand, the franchisor.

The franchisor-franchisee relationship often involves conflict. But they have come to a head this year: franchisees say their profits are being sucked away by new fees, the imposition of named vendors, and restrictions on their ability to sell.

According to an April 17 report in Washington, franchisees “are not fully benefiting from the risks they assume.” The federal document cites dozens of small business owners who said they lack control over the basic operations that determine their ability to make a profit.

They found a sympathetic ear in Washington and several states, leading to numerous bills that would limit the power of franchisors.

Franchisors have successfully opposed most of these new laws, which McDonald’s CEO Chris Kempczinski describes as an existential threat.

“In truth, our business model is under attack,” he said in February at the convention of the International Franchise Association, an association of franchisors, franchisees and suppliers. “If you think these bills have no impact on you, think again. »

The Federal Trade Commission requires franchisors to disclose to aspiring franchisees factors such as start-up costs and financial results of the business. Some states also have laws regulating the right to sell one’s franchise.

But much of the relationship is unregulated: for example, the changes a franchisor can make to contracts or the suppliers it can impose.

Keith Miller, who operates Subways in California and who campaigns for the rights of franchisees, blames this lack of supervision for the recent surge in litigation.

Franchisors say the business model remains beneficial to franchisees and that new laws would protect underperforming operators at the expense of everyone else. In 2021, 82% of franchisees surveyed by Franchise Business Review said they support the management of their franchisor, said Matthew Haller, CEO of the International Franchise Association.

But legislative battles at the state level prove that the tension is mounting.

Franchised hoteliers, already penalized by the pandemic, say they are suffering from the loyalty programs of hotel brands, which oblige the hotelier to rent at a reduced rate. A New Jersey bill that would limit these programs faces fierce opposition from the American Hotel and Lodging Association (AHLA). The law would also limit the discounts that brands can receive from suppliers imposed on franchisees.

AHLA CEO Chip Rogers says the bill would “undermine the very foundations of hotel franchising by limiting a brand’s ability to uphold its standards.”

Laura Lee Blake, CEO of the Asian-American Hotel Owners Association, counters that her 20,000 members are on the brink of despair. She recounts numerous encounters with franchisors where she “tried again and again” to get change: “They refuse to listen. »

In Arizona, a bill aims to strengthen the right of franchisees to sell their business and to protect their right to form an association without exposing themselves to reprisals from franchisors. They oppose it. Two committees approved it in February and March, but the International Franchise Association hired two lobbying firms to oppose it before the house vote.

Republican Party lawmakers have denounced the legislation, accusing the government of interfering “with clubs” in private sector business relationships. The bill’s sponsor, Democrat elected Anastasia Travers, says she was taken aback by the speed and strength of the opposition. She renounced to have this project adopted during the 2023 session.

“Time has not been on my side,” Ms. Travers said.

A similar bill in Arkansas was also emasculated after the International Franchise Association denounced it as “the most extreme regulation of any state.”

The draft was amended to remove entire sections, including one that would have prevented franchisors from imposing any requirement that “unreasonably alters” the financial terms of the relationship as a condition of renewal or sale. After the bill was stripped of much of its substance, the International Franchise Association gave its blessing and the law was quickly passed.

At the federal level, the Democratic administration is acting on two fronts.

The Federal Trade Commission in March demanded information on how franchisors control franchisees. This initiative could lead to new rules, which angers franchisors.

For its part, the Commission des relations du travail has proposed to facilitate the designation of franchisors as “joint employers”. This would make them liable for franchisee labor violations, if the franchising terms materially determine working conditions. Franchisors argue that this would be an unacceptable business risk that would “destroy” the business model.

Faced with this turmoil, franchisors blame the unions. The Service Employees International Union, in particular, has long demanded that McDonald’s be designated a “joint employer.” This would launch a campaign to organize the entire chain, rather than store by store.

Ironically, franchisees could profit from the guesswork, says Robert Zarco, a Miami attorney hired by an association of 1,000 McDonald’s owners. Because to avoid being designated joint employers (and avoid the business risk that entails), franchisors could choose to reduce their control over the activities of franchisees.

“If the company does not want to be considered a co-employer, the solution is very simple,” said Mr. Zarco. It just has to remove all the excessive controls it has put in place and keep only what protects the brand, the product and the quality of the service. »