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Are Franchisors Inching Toward a Cliff? How Much Control Is Enough?

It seems to be human nature to want to stand as close to danger as possible—believing you have a solid footing to avoid falling over.  This is demonstrated by recent news reports of people dying while taking “selfies”, including one couple who tumbled off a cliff together in front of their young children.   It strikes me that franchisors’ push to control every possible aspect of the franchisee’s business derives from the same source.

It should be no surprise that courts and government agencies are struggling with whether franchisors have liability for certain acts or omissions by franchisees or their employees.  Prospective franchisees almost invariably point to their desire to operate an independent business (as distinguished from the company they were last employed by) so they can make their own decisions and affect their destiny as one of the key reasons for investing in a franchise.  When asked to identify the indicia of independent ownership, they generally come up with:  control over amount of initial investment in equipment; control over the cost of occupancy; control over sourcing and cost of goods; control over labor costs; control over prices charged to customers; control over remodel and upgrade costs; and control over selling the business or passing it on to their family.

What we find is that franchisors retain for themselves the right to control just about every aspect of operation of the business, from what equipment to install, to how and how often to maintain equipment, to cleaning instructions, to who the franchisee can employ as a manager or assistant manager, to criteria every employee has to meet, and so on and on.  As franchisors have increased their right to control so many of the minutiae of business operations, the concept of “independence” is at risk of becoming nothing but a myth.  It is not surprising that courts and agencies are looking beyond the words of the contract to the economic realities on the ground.  They may look at the contract with its multitude or recitations about how the parties are “independent contractors” as one factor, but then they look at the operations manuals, the training, the inspection procedures, the counseling procedures, and other “real world” facts.  If the economic reality is control (or the right to control in states like Washington), no one should be shocked that the person with control is held accountable for actions of the servant who is merely following instructions.  That has been the law for centuries.

The pending National Labor Relations Board (NLRB) case involving McDonalds and the recently reversed Craig O’s Pizza case are just two recent examples of how courts are becoming sensitized to the realities in franchising—where, on close examination, many franchisees are little more than managers who, to get their job, had to assume all the risks inherent in the business—over which they have little control—in some cases less ability to make decisions than the manager of a company-owned outlet.  These decisions could be an isolated occurrence—however, it would be prudent for the franchise industry and individual franchisors to begin to examine their systems in light of the facts that led the NLRB and the trial court in Craig O’s Pizza to reach the decisions they did.

It is time for franchisors and their advisors to recognize that there is value to all parties in having fair and balanced franchise agreements that respect the true independence of the franchisees while providing them with a brand and a system that has, presumably been thoroughly proven to result in a reasonable probability of profitability.  It is time to question whether so much control (or right to control) is really necessary—or whether it is just a blind following of everyone else out of unfounded fear that failure to retain absolute control will somehow deprive them of a small amount of potential profit.  Is it really necessary to require franchisees to purchase every product used or sold in the business from a short list of suppliers (many of whom pay kickbacks for the privilege of being on the list)?  Is it really necessary to control who and when the franchisee can hire and fire?  Is it really necessary to squeeze out every possible penny of profit such that the franchisee is left with having to work uncompensated for years in hopes of somehow, someday, being able to salvage part of the life savings they invested?  You will not find ultimate answers here—but these are questions that someone has to start asking.

This much is certain—if franchisors continue to assert greater and greater control (or right to control) over the business operations of their franchisees, they will be like the couple in the “selfie”—a beautiful snapshot of what was.

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About Howard Bundy

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I have been practicing law for over 30 years in the greater Seattle, Washington area. My office is currently in Kirkland, just a few miles from downtown Seattle. I represent franchisees in deciding whether to invest and in dealing with all of the issues that arise between them and their franchisors. I represent franchisors in preparing their contracts and disclosure documents and in getting registered to lawfully sell franchises. In addition, I handle many of my clients' real estate, business entity, contract and general business needs.

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Franchise Consultant