NRN editor and restaurant operations expert Ron Ruggless breaks down what you should be watching in the industry this week. Connect with him on the latest operations trends and news at @RonRuggless and [email protected].
No small amount of chest thumping and flagellating has gone on in the wake of the National Labor Relations Board’s late July ruling that McDonald’s could be considered a “joint employer” along with its more than 2,000 franchisees in the United States.
Oak Brook, Ill.-based McDonald’s, whose franchisees own and operate more than 90 percent of the brand’s 14,000 U.S. locations, plans to contest the NRLB ruling.
A survey of commentary surrounding the issue indicates the weight of the ruling remains fogged.
Dawn Sweeney, president and chief executive of the National Restaurant Association, wrote in Roll Call that, “the NLRB overturned a 30-year rule that gave franchisees the freedom to run their day-to-day employment practices independently of their franchisor — hiring, shift schedules, terminations.
“A traditional firewall has now been eliminated, making franchisors liable for franchisees’ employment practices despite the fact that franchisors have no control over those practices,” Sweeney said. “It is a dangerous path that dissolves the long-established ‘joint-employer standard’ that has helped create millions of restaurant jobs through the franchisor/franchisee model.”
She said the steps the NLRB is taking “will have dire consequences to franchisees, franchise employees and the economy as a whole.”
However, at least one credit rating agency saw less impact on franchising.
Fitch Ratings, one of the three large credit rating agencies, issued a statement saying “We believe the development will not have a direct impact on the credit quality of franchisors.”
Fitch added that “franchising is an extremely profitable business model, resulting in EBITDA margins ranging from 40 percent to 60 percent plus for U.S. restaurants that franchise the vast majority of their units, such as Burger King Worldwide Inc., DineEquity Inc. and Dunkin' Brands Group Inc.”
Even if joint-employer status were to expand outside of McDonald's for employee claims at other restaurant franchisors, it would not change the economics of franchising, as the franchisors could shift the costs to franchisees, Fitch said.
“Franchisors are likely to adjust terms,” the rating agency said, “including ongoing royalty rates and franchise fees, of future franchise agreements to accommodate higher business risk from the sharing of potential employee-related liabilities.”
Why the NLRB's Whopper of a Ruling Will Have Massive Ripple Effects http://t.co/zYCZamiYAG @jeremyquittner
— Inc. (@Inc) August 4, 2014
Jeremy Quittner, summing the situation up in Inc. magazine, said many questions remain unanswered.
“Opponents of the memorandums say the NLRB is attempting to overturn decades of accepted legal framework around the concept of joint employership, where a discreet wall has allowed large corporations to license their products to franchisees, who are responsible on a local level for hiring, firing and setting wages,” Quittner wrote. “Proponents say redefining who qualifies as a joint employer could lift the veil on abusive corporate practices that make it hard for franchisees to operate and for their workers to organize in the first place.”
Pro-worker rights groups such as the National Employment Law Project (NELP) say franchisees and their workers could benefit, Quittner said, citing Cathy Ruckelshaus, general counsel for NELP.
“The allegations in the lawsuits filed for wages and hours is that the franchisees were squeezed so much by their franchise agreements, that they had little wiggle room and little autonomy" to fix the problems, said Ruckelshaus. By assigning joint employer status to McDonald's, NLRB is hoping to bring in a responsible party to do just that, she said.
Debate is still young
(Continued from page 1)
Michael Hiltzik, Economy Hub columnist for the Los Angeles Times, noted that the terse NLRB ruling “has the potential to bring U.S. labor law into sync with the 21st century.”
Hiltzik said the ruling, which involves at least 43 labor violation cases filed against McDonald's since November 2012, punched “a hole in the claim used by retailers and restaurant chains to dodge responsibility for their front-line workers: that working conditions are set by the small businesses operating the franchises, not by corporate headquarters.”
“This claim long has been transparently bogus,” Hiltzik said. “McDonald's, like many other franchisors, exercises rigorous control over almost all aspects of a franchisee's operations — uniforms, food quality and preparation, store design, hours, prices. The branded company monitors these standards with secret shoppers, and backs them up with economic cudgels that can make indentured servitude look like a big party. A well-performing franchisee can be offered more stores, and a poor performer might find a competing store opening down the street.”
Hiltzik quoted Catherine Fisk, a labor and workplace expert at UC Irvine law school, who said, “Conceptually, this is a big step.
It shows the [NLRB’s] general counsel is trying to adapt to the evolving nature of the restaurant business.”
She noted that the ruling has to travel a long road of board adjudication and likely court reviews.
“The interests of the franchisors and their franchisees are constantly in tension,” Hiltzik noted. “The danger of the NLRB counsel's ruling is that while it might stick the big companies with responsibilities for workers, the big companies will stick the franchisees with the costs.”
Other observers saw an even more ominous outcome.
Tim Worstall, writing in Forbes, cited a July 31 opinion piece by Andrew Puzder, chief executive of Carl’s Jr. and Hardee’s parent CKE Restaurants Inc., who said the NLRB decision had “potentially devastating economic effects.”
“There’s a number of problems with this decision ranging from the way that it overturns what has long thought to be settled law, to it obviating already signed contracts but perhaps the greatest problem is that it calls into question the entire validity of the franchise system,” Worstall said.
“Imagine the upheaval in the fast-food industry if tens of thousands of restaurants accustomed to operating independently suddenly were forced to work hand in hand with franchisers on every employment-related decision,” he continued. “Franchisers would have to review countless job applications at restaurants across the country, while consulting on compensation structures and bonus plans at individual restaurants.”
In addition, he theorized, since franchisors would have little economic incentive to control labor costs.
“That would hamstring franchisees, endangering their businesses,” he wrote.
The debate around the NRLB McDonald’s ruling is still young.
Contact Ron Ruggless at [email protected].
Follow him on Twitter: @RonRuggless
