Future of franchise model in question
05 SEPTEMBER 2014 6:23 AM
Hoteliers are concerned a possible new legal doctrine could make franchise companies liable for the employment actions of their franchisees.
REPORT FROM THE U.S.—A late July decision by the Office of the General Counsel of the United States National Labor Relations Board has the hotel franchising community in fear of possible major changes to the long-standing business model.
In an investigation of labor practices by some franchisees of McDonald’s USA, the general counsel threatened to name the parent company as a joint employer of its franchisees, making McDonald’s as a franchisor liable for the acts of its franchisees.
Should the general counsel’s opinion prevail, the hotel franchising business arrangement could also dramatically change, sources said.
“It could be devastating because it strikes at the heart of the franchising model,” said Chip Rogers, VP of government affairs and public relations for the Asian American Hotel Owners Association. “There is a long list of reasons why franchisors choose to franchise their businesses. If they wanted to run a nationwide business in which all the employees were employed by the company they would do that, but instead they franchise.
“If this were to become law, essentially it would end franchising as we know it,” Rogers said, adding he believes unions are behind the effort to link franchisors to the liability of their franchisees.
“This has been one of the goals of organized labor,” he said. “(Unions) aren’t big fans of franchising, and they believe they stand a better chance of organizing local stores if in fact they’re not owned by a local owner, but by a corporate entity.”
David Sherwyn, a professor in the School of Hotel Administration at Cornell University, said the increasing number of select-service hotels in the industry is in part spurring organized labor to target the hotel industry.
“They’re not just satisfied with going after fast food,” he said. “(Organized labor) will continue to push its agenda into hotels, and they’re going to argue that franchisors exercise too much control.”
Bill DeForrest, president and CEO of Spire Hospitality, an Illinois-based operator of 20 hotels, dispelled the notion that franchise companies are deeply involved in the operations of their franchisees’ hotels.
“They’re not in the business of controlling how we manage our associates,” DeForrest said. “The franchisees control the business on a day-to-day basis as long as they are good brand citizens. If not, then the franchisor will take steps to correct it.”
He said it’s also important to draw a distinction between the fast food and hotel industries and their business models.
“In the hotel business, franchisees actually own the real estate and run their businesses, whereas the franchisees in a lot of fast food businesses don’t actually own their real estate,” he said. “One of the things we struggle with is that people just don’t understand how (the hotel) business is structured, that it is really a collection of entrepreneurs and small business owners.”
Sources said continued expansion of franchising in the hotel industry might depend on a favorable outcome of the NLRB case.
“We need the franchisor-franchisee relationship as it stands today, and I don’t see how that can change,” DeForrest said. “The ability for an entrepreneur to enter into our business could be harder because the process by which franchises get approved and the process by which they have to manage and report would be so much different. It could limit the ability of our industry to grow.”
Sherwyn said franchise companies have a specific role, but it is not to dictate every management decision of their franchisees.
“Every big franchisor has a lawyer whose job it is to make sure the franchisor is not liable for things that happen on their franchisees’ watch—whether it is slip and fall injuries, sexual harassment suits, wage and hour violations or union organizing,” he said. “Hotel franchisors can set brand standards and they can advise their franchisees to have a sexual harassment policy, for example, but they don’t draft the policy. That would be exercising too much control.”
A permanent solution
Sherwyn said it might take years for a definitive ruling, probably in the court system, before the joint-employer doctrine becomes a legal precedent, if it ever does. In the meantime, the franchise industry might be “living in a state of flux,” he said.
“Franchisors are wondering, ‘If this is the future, what do we do? Do I continue to enter into franchise agreements? Do I continue to grow through this model? Will the courts uphold the NLRB and, if so, do I want to be in this model anymore?’” he said.
Rogers believes the ultimate solution might come through legislation.
“It will certainly be tied up in the courts for some time, but it would be best for Congress to alleviate that by making a clear statement on the rights of franchisors and the rights of franchisees,” he said. “If legislation is necessary to correct or clarify this, then that is the route we need to take.”