CFA Opposes Joint Employer While Addressing Franchisor Control

On July 29, 2014, the National Labor Relations Board (NLRB) issued an Advice Memorandum (“memo”) which would greatly expand liability for franchisees across the country. The memo creates an expanded definition of the joint employer standard and directs administrative law judges to hold franchisors and franchisees jointly liable in a greater number of labor-related cases.

The previous standard on determining joint-employer status — which has been in place for 30 years—recognizes separate business entities as joint employers if they “share or codetermine matters governing the essential terms and conditions of employment…[meaning] matters relating to the employment relationship such as hiring, firing, discipline, supervision and direction.” The NLRB, however, has imposed a new, broader standard that would result in a joint employer finding whenever “industrial realities” make an entity essential for meaningful bargaining.

The Coalition of Franchisee Associations (CFA) opposes the NLRB’s new joint employer definition. Expanding liability eliminates the ability of franchisees to operate independently and act in the best interests of their employees and customers. With the threat of increased liability, franchisors will exert even greater control over franchisees and reduce the franchisees’ role to that of glorified managers. Further, in order to protect the brand and support franchisees with more staff and resources, franchisors are conducting massive brand consolidation and eliminating the single store operator.

CFA is also concerned about the legal implications of this new standard on franchisee liability. Most, if not all, franchise agreements include an indemnification clause that absolves the franchisor of liability against lawsuits arising out of a franchisees’ business operations. Therefore, regardless of increased franchisor liability arising out of the new joint employer standard, franchisees will still be held solely liable for labor-related claims, which will no doubt increase due to an influx of lawsuits by those seeking compensation from the “deeper pockets” of franchisors. The result is an increase in franchisee liability as well as franchisor control – a lose-lose for franchisees.

The clearly stated purpose of the new joint employer doctrine in the franchise space is to unionize an entire franchise system’s employees of its numerous independent franchise owners. It seeks to accomplish this by forcing a franchisor to negotiate a collective bargaining agreement covering its entire system. CFA vehemently opposes any situation where a franchise owner is obligated under a contract negotiated by another party, particularly in systems where franchises are not operated by the franchisor negotiating the agreement. Such a franchisor will have few, if any, of the burdens of the employer who was frozen out of the negotiation and will have none of the costs. As discussed above, CFA’s franchise owners sign agreements which require them to indemnify any such cost borne by a franchisor in addition to their existing obligations to their employees.

While CFA opposes the new joint employer standard generally, it acknowledges the need to protect franchisees from franchisor control, overreach and the ultimate goal of unionization. In order to promote good faith and fair dealing, CFA supports increased franchisee protections in the areas of disclosure, transfer/renewal/termination rights, pricing, sourcing and encroachment, among others. We urge the franchisor community to support and adopt the principles as set forth in the Uniform Franchisee Bill of Rights as well as in federal, state and local franchisee rights legislation.

The Culture of Communication: Maintaining Company Culture with Multiunit Operations and Cross-State Companies

By Kristen Perez

As business owners, there are a multitude of aspects to concentrate on concerning of your employees. We all try to be diligent in our efforts to keep employee well-being a priority, as retention of top talent translates to the overall well-being of the company itself. From the efficiency of operations to maintaining a union-free environment; their satisfaction within the company cannot be overlooked. Oftentimes the main indicator or source of employee satisfaction within the company comes directly from the company culture itself.

However, when your company is expanding or you find that your locations are geographically widespread, maintaining company culture is no longer as simple as it once was when operating one or two locations. This is why it is important to dedicate thought and time into implementing a sophisticated company culture system within your network.

Too often do we presume that company culture is created by the mission, environment and personality of the company. These factors do effect culture, however, they do not solely create it. There is far more to culture and its maintenance than these aspects can account for, especially in large multiunit or geographically widespread operations. The key is to create and implement a system that will translate whether you have one location or hundreds. This can be accomplished by changing your thought on where company culture comes from which is simply: communication. The culture of a company is an evolving quality of the practices and styles utilized by your company in its communication tactics. By designing your culture of communication you can keep the culture you love as you grow.

Begin with the end in mind. There are a multitude of organizational cultures to sort through and it’s imperative that you acquaint yourself with the varying types of elements. Once acquainted, you must then determine what type of cultural element you desire most for your company. Is ‘transparency’ most important to you? Or is a ‘teamwork culture’ your ideal? First, define what type of element you see as the most beneficial to your company’s health and longevity. This will impact several factors for how you go about creating your culture as each trait caters to certain characteristics over others. If it is transparency that you are aiming for, your leaders must always be transparent as well, even if it means delivering less than desirable news. If it is a teamwork value that you wish for your culture to adhere to, everyone — from the hourly employees to your executive team — must be able to work congruently and smoothly as a unit and embrace group activities.

Foster Culturally-Focused Leaders. Once you have decided upon what type of cultural element you wish to centralize your company’s culture around, assign a representative who is implicitly involved with the general staff or structure to be directly responsible for culture. Assign someone who is responsible for hiring candidates or managing the team to set their priorities on maintaining culture simultaneously. As for the remainder of your leadership team, make sure they too embody the type of culture you desire. Their influence within the organization will directly impact the company’s culture, for when leaders act, employees view that as the accepted and desired action.

Organizational Structure Drives Culture. Ensure that the hierarchical structure of your company allows for the type of communication that your ideal culture fosters. If your goal was to implement a transparent company, allow for transparent communication between each rank, such as with feedback. This can be accomplished through channels such as a suggestion box or a companywide survey. However, employees will only feel compelled to provide their real feedback if they feel it is safe to do so and if the possible changes are genuinely considered.

If a team environment is your goal, create a structure that includes group activities. This can be done by incorporating quarterly or monthly office outings that are engaging and allow people to enjoy themselves as coworkers and people. Be creative with these outings and mix them up so that every type of personality will enjoy something and not expect the same event each time. Monotony is the enemy of excitement and you want your employees to be excited about work outings if a team atmosphere is your goal.

Continuously communicate. As culture is dynamic in nature, it is also prone to adaptation, or in the case of diverting further from your original goal: mutation. To protect the integrity of your company’s culture you must fight against the natural phenomena of mutation in your culture. By continuously reinforcing your ideals through constant communication and instilling proper “check lists” as part of your routine, you can protect your company’s ideal culture from such deterioration.

Company culture is a multifaceted and dynamic entity in an organization. However, as your company grows, it is a crucial element that will guide employees to act or behave in certain ways, even in times of uncertainty. It is the element that employees will not only carry within their day-to-day work demeanor, but will also project onto new employees or those outside of work. As such, your culture must be deeply rooted into the structure of your organization and cannot simply be empty words on a mission statement. With its integrity intact, culture can provide the framework that propels your company’s success, whether you operate a single location or a hundred.

Comments Needed on IRS Proposal to Increase Estate Taxes

On Aug. 2, 2016, the U.S. Treasury Department (“Treasury”) and the Internal Revenue Service (“IRS”) released proposed regulations under Internal Revenue Code § 2704 that, if finalized, will drastically reduce the ability of franchisees to transfer their businesses to family members. Click here to write to the Treasury Department and express your concerns over their proposed regulations!

Currently, when gifts (during lifetime) or bequests (at death) are made, discounts are typically applied to allow for lack of marketability and for minority ownership. These discounts are commonly used by franchisees when transferring their family business from generation to generation. Treasury’s proposal severely limits the use of valuation discounts for any type of family limited partnership or other family business transfer where the family will retain control before and after the gift or bequest occurs. Specifically, the new rules would include the imposition of a new three-year look-back period to determine whether a minority valuation discount should apply (limiting deathbed transfers used to create a minority interest), expand restrictions in situations where the family will retain control after the transfer, and broaden their scope away from focusing on restrictions that are “more restrictive” than available state law (given that many states have already shifted their laws to become more restrictive in recent decades).

These proposed regulations, if finalized in their current form, will specifically impact franchisees, for whom the value of their business declines with every passing minute due to the pre-determined timeframe set forth in their franchise agreement. Because the franchise model allows a third party – the franchisor – the ability to place substantial restrictions on transfers and sales of franchise agreements, the ability to pass on the business is significantly lessened. For these reasons, and many others, current discounts are particularly valuable to franchisees who cannot as routinely and easily sell their business as larger, publicly-traded and less restricted companies.

Comments on the proposed regulations are due by Nov. 2; it is crucial that franchisees explain why and how this will hurt their business, family and employees. Click here to access a draft comment letter that you can personalize.

Click here to let the Treasury know why this proposal is bad for small business!

Universal Franchisee Bill of Rights

Franchising is one of the most powerful brand building tools ever created. It is reported that franchising is responsible for 760,000 businesses, 18 million jobs, 14 percent of the private sector employment, and over $500 billion in payroll. Total sales by businesses operated by franchisees are projected to reach over $2 trillion this year. 1 out of every 12 businesses is independently owned and operated by a franchisee¹.

Over the last 50 years, franchisees have invested their capital and hard work in creating some of the most recognized brands in the marketplace. The success of franchising is predicated on the investment by franchisees. This is now at risk because the terms of the franchise agreements have become more one-sided in favor of the franchisors. They have significantly reduced the ability of franchisees to build their businesses and serve their customers.

This Universal Franchisee Bill of Rights² is a fairness doctrine. It has been developed by franchisees in multiple systems and industries to identify the basic terms of fairness that are missing in their franchise agreements, and must be restored to ensure the success and growth of the franchise systems.

1. Freedom of Association: A franchisee may freely associate with other franchisees or associations.

2. Good Faith and Fair Dealing: A franchisee may rely on a franchisor’s good faith, fairness, exercise of due care, and performance including the administration of; advertising, rewards programs, marketing funds, and franchise or development agreements.

3. Uniform Application of Brand Standards: Franchisors shall maintain consistent operating standards under a specific franchise system brand name and uniformly apply such standards in a non-discriminatory manner.

4. Full Disclosure Regarding Fees Collected From Franchisees: A franchisor shall make available to the franchisee all records of marketing, rewards programs, and related fees that have been paid by franchisees, vendors, suppliers, and licensees.

5. Right to Price: A franchisee may establish the price of goods and services it sells. 6. Fair Sourcing of Goods and Services: A franchisee, or franchisee purchasing cooperative, may purchase, from any vendor, goods and services that meet the formally established standards of the franchisor. 7. Right to Renew the Franchise: A franchisee may renew its franchise under terms free of unreasonable costs and or stipulations.

8. Right to Transfer: A franchisee shall have a right to transfer its franchise to a qualified purchaser, including, but not limited to, family members or business partners, without unreasonable costs, stipulations or penalties.

9. Encroachment: A franchisee shall have specific market protection wherein the franchisor shall not materially impact the franchisee’s business, or allow another entity with the same or a similar brand to operate.

10. Ample Notice of Significant Change; Franchisee Termination Rights: Notice of significant change to the franchise system shall be given in a reasonable time prior to required changes. A franchisee may terminate without penalty, or liquidated damages, if a change to the franchise system would cause substantial negative impact or if the franchisee is experiencing substantial financial hardship. Under such termination any non-competition covenant shall be void.

11. Default; Franchise Termination Rights: Prior to franchise agreement termination, the franchisee shall be given detailed reasons for alleged default and reasonable time to cure. Termination shall not occur without good cause, and termination shall not compel payments of liquidated damages, and or early termination fees. All franchise agreement rights shall remain in full effect for any franchisee not in default or that cured a default. A default under one franchise agreement shall not constitute a default under a different franchise agreement.

12. Fairness in Dispute Resolution: A franchisee may elect to have all dispute resolution proceedings and legal action occur in the local venue of the franchisee and shall not be required to submit to mandatory binding arbitration.

13. Equity and Property Rights: A franchisee has equity in their business, has made a substantial investment in their business and shall have the right to monetize that equity and investment prior to the expiration or termination of the franchise.

1. “The Economic Impact of Franchised Businesses: Volume III, Results for 2007”,  International Franchise Association Educational Foundation
2. The “Universal Franchisee Bill of Rights” is a hybrid compilation from significant work that has been done by the AAFD, AAHOA, AFA, CFA Fair Franchising Committee, individuals from those prominent organizations, and other friends and supporters of franchisees. It is the intent that we create a “Universal Franchisee Bill of Rights” that no one organization can claim as their own, but members of the greater franchise community can endorse.

Endorse the Franchisee Bill of Rights by adding a comment below!

Click here to download a copy of the Universal Franchisee Bill of Rights

Government Overreach Continues Even After You Die

By Rob Branca

The U.S. Internal Revenue Service has issued long feared proposed regulations (REG163113-02) that intend to take more of the estates of small business owners, preventing family businesses from being passed on to their children. As has been often lamented about children being forced to sell the family farm to a McMansion developer or a large corporate farming interest to pay the punitive “Death Tax,” so too does this fate befall franchise owners.

The IRS seeks to eliminate the common discounts taken for lack of marketability, minority ownership status and lack of control, among others. Family businesses often place these restrictions on shares in the business that they gift to their children. These are not publicly traded shares of Bank of America that can be routinely and easily sold for a publicly known value. There simply are no non-family buyers for a share in a family business, regardless of how successful it is; thus the discount in valuation down from fair market value.

The IRS now wants to value those gifts as if they were indeed arms lengths sales for full fair market value in order to apply the Death Tax to them and confiscate parents’ equity in their businesses. This eliminates room in the exclusion of assets that may be gifted from one’s estate ($5.45 million per grantor) by inflating the value of every gift, leaving anything outside of the exclusion subject to the massive Death Tax.

Franchises are especially vulnerable if these regulations are amended because of factors particular to franchising that naturally depress share price. Most notably, there is an omnipotent third party in franchise transfers that is not present in a non-franchised family business: the franchisor. Franchisors typically posses the power to not only apply not insubstantial fees on transfer, franchisors can also deny them outright. Franchisors also typically possess a right of first refusal to step into the shoes of any transferee.

Transferees often price the uncertainty created by these franchisor rights into the purchase price, knowing that the time and money spent on due diligence, negotiation, attorneys and accountants can be completely lost.

However, perhaps the most discounting factor in valuation of an interest in a franchise is the severely limited pool of buyers. Only an approved franchisee of the system is even eligible to buy at all.

One would ike to believe that the federal government would understand these natural limitations on value. However, the entire joint employer debacle now unfolding on the franchising industry is ample evidence that this is not true. Or, it may simply be that regulators do not care that their actions can wipe out small family businesses in the pursuit of tax revenue and appeasing special interests which are allied against franchising’s often wildly successful business model.

Rubio, Moran, Flake Introduce Bill to Protect Family Businesses

Washington, D.C. – U.S. Senators Marco Rubio (R-FL), Jerry Moran (R-KS), and Jeff Flake (R-AZ) today announced the introduction of the Protect Family Farms and Businesses Act (S.3436), legislation that would prohibit the Obama Administration from implementing its proposed regulations to unilaterally expand and raise the death tax on family-owned small businesses.

All three senators also joined 38 of their colleagues today in urging U.S. Treasury Secretary Jacob Lew to withdraw the proposed regulations, writing that “they directly contradict long-standing legal precedent, create new uncertainty for taxpayers, and put family-owned businesses at a disadvantage relative to other types of businesses.”

“Small businesses are the backbone of our economy, and for many Americans, the family farm or business represents an opportunity to pursue the American Dream,” said Senator Rubio. “The Obama Administration’s attempt to unilaterally raise taxes on hardworking entrepreneurs is wrongheaded and will kill jobs. As one lumber manufacturer in Florida whose family has built a business over four generations said, ‘this type of rulemaking is devastating to our communities.’ We can’t allow that, any more than we can allow this end run around Congress. My bill will stop this harmful regulation from taking effect and protect workers in Florida from losing their jobs.”

“The Treasury Department should pursue policies that encourage the creation and growth of family-owned farms or businesses – not those that will increase the tax burden on families and make it more difficult to transfer ownership to the next generation,” said Senator Moran. “I have long sought a permanent repeal of the estate tax, and I will continue to work to protect American farmers and small businesses from burdensome tax policies.”

“This proposed regulation will circumvent Congress and make it more difficult for family-owned businesses and farms to survive after the death of a loved one,” said Senator Flake. “These businesses are the primary employers in many of our communities and we should be reducing the unsustainable regulatory burden on them, not adding to it.”

Last week, Rep. Warren Davidson (OH-08) introduced the same bill (H.R. 6100) in the U.S. House of Representatives.

“Many family farms and businesses already operate on a thin margin. It’s unfathomable to think that when tragedy strikes a family that the IRS will hit them with a business-destroying tax,” said Rep. Davidson. “And now the IRS wants to unilaterally hike that tax, giving family businesses a terrible choice: downsize and lay off staff or sell the company. It is immoral that the government cripples businesses and families with this tax, and Congress must act to stop this latest executive power and revenue grab.”

The legislation is supported by the Coalition of Franchisee Associations (CFA), the International Franchise Association (IFA), and the Family Business Coalition, a group of 115 associations jointly representing millions of small businesses from nearly every sector of the economy.

“This bill prevents implementation of the U.S. Department of Treasury’s proposed regulations which greatly restrict estate and gift tax valuation discounts. If implemented in their current form, these regulations will greatly damage the ability of franchisees to pass their businesses down to their children and grandchildren,” said CFA Chairman Keith Miller and Executive Director Misty Chally. “CFA supports the Protect Family Farms and Businesses Act as it recognizes the limitations that are placed upon today’s franchisees and prohibits the U.S. Treasury from restricting the transfer of a franchise to family members.”

“The International Franchise Association applauds the introduction of the Protect Family Farms and Businesses Act, S.3436, by Senators Rubio, Moran, and Flake, which would prevent the Treasury Department from unilaterally increasing estate taxes on family-owned businesses and making it harder for families to pass their franchise small businesses down to their children,” said IFA Vice President of Federal Government Relations and General Counsel Elizabeth Taylor. “Franchise small businesses are a crucial component of the nation’s economy with over 733,000 franchise establishments nationwide and over 47,000 units in Florida alone.  If these regulations are enacted, it will hamper franchisees’ ability to continue to grow their businesses and create jobs in the future.”

“The Family Business Coalition strongly supports Senator Rubio’s legislation preventing the Treasury Department from hiking the death tax without the consent of Congress,” said Chairman Palmer Schoening. “The death tax hurts family business owners and farmers seeking to pass to the next generation. Changing tax laws should be left to the appropriate committees in Congress, not ceded to outside agencies.”