Business Management

by Simon Lord

last updated 26/02/2015

Who employs a franchisee's staff?

by Simon Lord

last updated 26/02/2015

January 2015 - How far are franchisors responsible for the employment issues of franchisees? It's a hot topic overseas with major implications for New Zealand.

One of the advantages that franchises traditionally offer over corporate-style businesses is that they enjoy a much flatter management structure. Having an owner/operator in charge of each unit localises decision-making in multi-unit operations, leading to better customer service and greater focus on controlling costs. But what happens when it all goes wrong?

When a 17-year-old employee of a KiwiYo franchisee in Whangarei chose to leave her job after being told to use the prescribed greeting for customers rather than just saying ‘Kia ora’, she took her grievance to the local paper which saw the opportunity to create a headline news story that ultimately dragged in the local MP, the Race Relations Commissioner, and thousands of online and talk-back commenters.

No doubt the media outlets concerned saw this as great engagement with their readers, although it was patently obvious from the comments that people brought their own prejudices to the issue and that precious few of them had bothered to read the original article or to understand what the people involved were saying.

The franchisor of KiwiYo did a good job in his response, pointing out that there is a genuine reason for requiring the greeting ‘Have you been to KiwiYo before?’ as it enables staff to find out whether a customer needs to have the self-serve system explained to them. He also said that the franchise had no problem with prefacing the required message with ‘Kia ora’ or any other appropriate words of welcome, and was going to recommend it be used at other outlets and even introduced to give a uniquely New Zealand flavour to the brand’s first store in China. The twittering masses, however, predictably ignored this and the result was considerable damage to the KiwiYo brand, an innocent franchisor and innocent franchisees.

Who is responsible?

When contentious issues such as this one arise, the immediate response of some franchisors is to distance themselves from the franchisee’s comments. That’s particularly true in employment issues, when franchisors are often keen to point out that staff are employed by the franchisee, not by the franchisor, and the dispute therefore has nothing to do with them. To their credit, KiwiYo didn’t rely on that defence.

But how far is a franchisor genuinely responsible for a franchisee’s actions? It’s a question that’s increasingly being raised around the world, not least by those who see franchising as a way that companies can avoid employment obligations. This opposition has created some strange bed-fellows: workers’ rights organisations are concerned about minimum wages and collective bargaining; legislators are confused about whether to treat franchises as big business or small ones; and corporates are worried that franchised competitors might gain an advantage by avoiding compliance costs.

Three US cases

The resulting confusion is apparent in three recent cases in the US. In July, the National Labor Relations Board announced a decision to treat the McDonald’s Corporation as a joint employer of its workers (along with its franchisees) with regard to a charge of unfair labour practices filed by unions. In August, a US Court of Appeal reversed a federal court’s decision that had found a franchisor can be considered the employer of a franchisee’s worker. That same month, a New Jersey judge ruled that four 7-Eleven franchisees may pursue overtime and minimum wage claims against their franchisor on the basis that they might be considered employees and not independent franchisees.

While much depends on the individual circumstances of each case, there are some interesting arguments being raised. The overturned ruling had suggested that because the franchisor provided training to new franchisees and their employees, and was ultimately aware of salary rates being paid, the franchisor was a joint employer. This was rejected for several reasons, including the fact that the franchisor did not possess the power to hire or fire a franchisee’s employees or determine their pay rates. In the 7-Eleven case, the court found that the franchisor’s regulation of vendors, equipment maintenance, product supply, uniforms and store environment resulted in ‘an economic reality of dependence’ on 7-Eleven which supported its franchisees’ claim to be classified as employees.

What can be done?

One of the options being touted to US franchisors is that they step up their supervision of franchisees’ labour practices to ensure total compliance with the laws – a considerable cost. Another is that they step away from providing any employment advice or standards at all. Both of these options are extreme and impracticable. The third is that the IFA gets into a pitched battle with both legislators and the unions - a fight that IFA CEO has described as 'long, arduous and costly.'

Franchisors do have to set standards, train and audit franchisees for the protection of all, but they also need to allow franchisees the freedom to operate their businesses. However, when things go wrong ­– as we’ve seen with KiwiYo ­– whatever the law says, the franchisor has to be prepared to jump in to protect the brand. In the real world, the brand, franchisor and franchisees are seen as one.

This article was first published in NZ Business magazine

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