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Franchising industry now has a government target on its back

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For the over 9 million employees in the U.S. franchising industry, a storm is brewing. A new federal ruling enacted by the National Labor Relations Board rewrites joint employment law, which could upend the traditional way local franchisees independently hire, set wages, manage their staff and run day-to-day operations on Main Street. Under the ruling, a franchisor and franchisee can be deemed to share the ability to govern the workers' terms and condition of employment — tasks that have traditionally been left to the discretion of franchisees.

The ruling, based on a decision involving waste-management company Brown-Ferris Industries of California, has been widely viewed as a victory for unions looking to hold large corporations liable for labor practices at individual locations.

Under the old standard, a company had to have direct control over employment conditions to be a joint employer, but the new test considers indirect and unexercised control.

The labor board, which is charged with protecting workers' rights to organize and fair labor practices, has said its goal is to make sure companies in all industries can be held responsible for labor violations committed by their contractors. CNBC contacted the NLRB for their views, but the organization declined to comment.

McDonald's, like many other franchise chains across the country, is waging war against the U.S. National Labor Relations Board to preserve the decades-old franchising model that fast-food companies — and all other corporate franchisors — have adopted. Under the traditional system, the franchisor is not responsible for the workforce of independent franchise owners who are typically small businesses operating under a corporate brand umbrella. The large fast-food chain has more than 14,200 outlets in the United States that employ 90,000 workers.

Last December the NLRB began targeting McDonald's by issuing unfair labor practice complaints against McDonald's franchisees and their franchisor McDonald's USA. It has been reported that NLRB plans to hold the corporate parent liable as "joint employer" along with the franchise operator. Workers began filing complaints with the NLRB in 2012, saying that McDonald's and some franchisees threatened, surveilled, disciplined and fired them for protesting for higher wages and union rights in the demonstrations. Those complaints came well before the Brown-Ferris case broadened existing NLRB "joint employer" standards, and McDonald's was again embroiled in a trial before an administrative NLRB judge over these issues in March, which received national attention.

According to a McDonald's USA spokesperson, "This is just the first step in what is likely to be a long process, and despite what happens at the NLRB hearing, McDonald's USA will continue the fight through the administrative process and eventually into a court of law where we feel confident we will then have a fair process and ultimately prevail."

As she stated: "McDonald's USA is not a joint employer. The NLRB is applying a new legal standard that would undermine a successful American business model that has enabled thousands of families to operate their own small businesses and support millions of jobs."

"The NLRB ruling is a nebulous standard that allows them to target any business contractual relationship they want," said Michael Layman, vice president of regulatory affairs for the International Franchise Association. "It doesn't just affect the franchising industry. It affects how car manufacturers and car dealerships across the country oversee their workforces, too."

The IFA has also said that it is concerned, because entrepreneurs are drawn to the industry so they can operate independently. This new ruling makes the future unclear, and it could possibly damage investment into the sector.

"It is an attack by bureaucrats and union bosses that can stunt job growth and do damage to the economy," said Aziz Hashim, chairman of the IFA and managing partner of NRD Capital. "Franchising contributes $1.5 trillion annually to the U.S. economy and is the largest vocational system in America. We train people to do jobs and pay them at the same time. It's a gateway to entrepreneurial opportunity. Why stymie its growth?"

"The good news is that the franchising industry is trying to get ahead of the problem," said Gerry Weber, CEO of Fast-Fix, a jewelry- and watch-repair chain with 160 locations throughout the United States that employs 900 workers. "They are lobbying in Washington, along with other trade groups to ensure this new ruling doesn't get traction."

"So far, none of our franchise owners are panicked," he stressed.

"Franchising contributes $1.5 trillion annually to the U.S. economy and is the largest vocational system in America." -Aziz Hashim, chairman of the IFA

The GOP has introduced legislation to roll back the decision. Lamar Alexander, R-Tenn., Senate Labor Committee chairman, and John Kline, R-Minn., House Committee on Education and the Workforce chairman, have stated that the new standard "would wreak havoc on families and small businesses across the country." Recently, House Speaker Paul Ryan said this issue is one of his top priorities.

Some governors, including Gov. Rick Snyder of Michigan and Tennessee Gov. Bill Haslam, have signed bills to stop the trickle-down effect of the NLRB's controversial Browning-Ferris ruling. These bills reversed the decision and make it clear franchisees operate as independent business owners under state law.

"It's really an effort to allow unions to work their way into our industry," said Jania Bailey, CEO of FranNet, a franchising consulting firm. "Instead of having to reach out to workers at each individual franchisee, you can reach all workers in the franchisor system. I am hoping a reality check will help this ruling get reversed."

"Now everyone is trying to understand where all this is headed," said Richard Rosen, an attorney who specializes in franchising law and is current chairman of the New York State Franchise Bar Association. "I don't think the franchise industry is doomed. I don't think franchise companies will be going out of business on a wholesale basis. Certainly, it is making everyone more aware of this issue, and it's not an easy issue, because you really have a dichotomy of interests here that have to get worked out."