Matthew Patinkin’s company owns and operates 65 Auntie Anne’s Pretzels shops, eight within Chicago.
As a franchisee, he decries a decision last week by the general counsel of the National Labor Relations Board that could put his franchisor — Fortune Brands — on the hook for any employment law violations that occur at his stores.
Last week, McDonald’s Corp. was informed it would be held “jointly liable” for at least 43 alleged employment law violations that occurred at stores owned by franchisees. While individual franchise owners would face no new legal liability if that holds, they appear just as opposed to the move as McDonald’s, which called it “wrong.”
Patinkin’s concern doesn’t stem from a corporate version of Stockholm syndrome — he’s looking out for himself, too.
He’s worried because of a delicate balance in the franchise business model: The more control he has over his business, the less it costs Fortune Brands. In turn, that saves him money.
“As a franchisee, I view myself as an owner of my business, and any prospect otherwise is a scary thought,” Patinkin said Tuesday at a quarterly meeting of the Northern Illinois Franchise Association.
Concern and uncertainty were a side dish at the lunch meeting at Big Bowl in River North attended by about 30 people, including franchise owners, bankers looking to provide them with small-business loans and at least one lawyer.
Tellingly, there were even representatives of a company that sells software to help franchisees and franchisors hire and train employees.
Andrew P. Bleiman, a partner at Marks & Klein LLP and co-founder of the NIFA, opened the meeting by referencing the NLRB action: “Obviously, there’s a lot going on in franchising with legal issues.”
Mark McSteen, hired May 30 as an executive at the International Franchise Association, rattled off a series of challenges facing the industry since his arrival in that spot. California protests for a higher minimum wage led to a similar outcry in Chicago, culminating in the McDonald’s ruling last week.
“Is it always like this?” McSteen asked.
Nick Cronin, of the Chicago-based company Hireology, said the issue is top-of-mind for franchisors — some of whom are considering taking more control of the hiring process at their franchise stores, he said.
That is Patinkin’s chief concern.
The NLRB general counsel’s decision to charge McDonald’s as a joint employer is far from a final decision. And even if the company is found to be a joint employer at the end of the legal process, it is unclear how that would apply to other franchise brands.
But Patinkin said such an outcome would give franchisors “no choice but to take an involved leadership role” in employment decisions at franchise stores.
“At a minimum, they may have to set standards or parameters for who could be hired,” he said. “And clearly, when it comes to disciplinary decisions or termination decisions, I would believe the franchisor would absolutely want to give its approval.”
Patinkin also wondered whether the franchisor would be liable for injuries to employees or lawsuits that may arise from criminal activity carried out by employees. The extra responsibility could lead franchisors to hire a legion of managers that would oversee employee relations at franchise stores, he said.
“What that means is the franchisor will have to spend more money,” he said. “And if they’re going to have to incur those kinds of expenses, that will filter down to the franchisee level, which is once again a negative for us individual franchise business owners.”
Franchisors exerting more control over their franchisees’ hiring process is one possible outcome, according to Adam Robinson, the CEO of Hireology, which provides hiring and training software and tools to 70 brands and 1,500 individual locations.
“If you have an owner-operator network representing your brand and you’re not sure what their hiring practices are — how they’re picking talent, managing performance or what they’re doing with regards to the overall process for talent selection — you ought to be really worried,” Robinson said.
“It seems that at some point, the federal government will say outright, ‘You can’t argue this is a black box. You’re liable.’”
But depending on the outcome of the McDonald’s case and how far-reaching of a precedent it sets, franchisors may want to stress that they have less control of employment at franchise stores. That may help them avoid liability under a less-expansive ruling.
“The uncertainty alone has the potential to impact the growth rate of the industry,” he said.
Patinkin said a negative outcome for franchisors could cause some to entirely eschew the franchise business model.
The International Franchise Association predicts gross domestic product from franchise industries will grow by 4.5 percent this year to $493 billion. The wider economy grew at a 4 percent annual rate in the second quarter this year. GDP has not grown by more than 3 percent in any year since 2008.
The keynote speaker at the NIFA event had a less dire takeaway on the NLRB-McDonald’s case.
Tony Lamb, the founder of a shaved-ice truck business that has grown to more than 600 franchises since 2006, told a story about overcoming environmental and other regulations to get one of his Kona Ice trucks into Los Angeles. The resulting truck — the only one permitted in the city — became a model for other cities.
He told that story after referencing the McDonald’s case and saying: “The more regulation, the better. Because, by God, when we get over it — and we will get over it — the pasture will be so great.”