Being a franchisor in today’s competitive business world, and under the scrutiny of the federal government, brings about many issues that you need to keep track of to remain competitive and compliant with legal matters. Many franchise related lawsuits have elevated issues to the forefront and new technologies have challenged the franchisor/franchisee relationship. Below is a high-level overview of the main issues facing franchisors today. We will be starting a blog series focusing on each of these issues over the next few months.
NLRB’s position on joint-employer regulations
After the reversal of the 2015 joint-employer ruling in December 2017, the National Labor Relations Board (NLRB) continues to move forward with establishing rules and guidelines on joint-employer relationships. The current proposed rule expresses an employer may be found to be a joint-employer of another employer’s employees only if it possesses and exercises substantial, direct and immediate control over the essential terms and conditions of employment and has done so in a manner that is not limited and routine. This is great news for franchisors. On April 1, 2019, the Department of Labor proposed a four-factor test to determine whether a joint-employer relationship exists. The four factors are:
- Hire or fire employees;
- Supervise and control the employee’s work schedules or conditions of employment;
- Determine the employee’s rate and method of payment; and
- Maintain the employee’s employment records
Stay tuned as this proposed rule works through the various levels of government to be finalized.
Maintaining brand quality
The brand is everything for a franchise system. Having the right tools in place to ensure standards and quality are met is paramount to the success of a brand. There are many emerging concepts with a few corporate locations that are jumping right into franchising, which can be a recipe for disaster if the right procedures and processes are not in place. We’ll be discussing best practices on maintaining brand quality whether you are a mature brand or an emerging brand.
Advertising fund transparency
Advertising funds are common for the franchising world as each franchisee contributes a certain percentage of revenues to support brand development and marketing efforts. Depending on your franchise agreement, you may have an obligation to provide audited financial statements of the advertising fund to the franchisees. Everyone is happy when sales are good, but when sales drop, finger pointing to the marketing efforts happens. A recent lawsuit by the franchisees of Jack in the Box has highlighted this issue as the brand’s sales have dropped in recent quarters and the franchisees want to understand how their advertising fees paid are being used to market the brand. We’ll be discussing some best practices to improve transparency and how to better collaborate with your franchisees.
The trend of refranchising corporate stores to franchisees has been going on for a while and I don’t see it ending anytime soon. There are many benefits to refranchising corporate stores but there’s a balance to maintain. As the franchisor, it’s important for you to still have skin in the game to understand the challenges your franchisees are experiencing. We’ll be discussing how to achieve that perfect balance to maximize profits through refranchising, maintain control of the brand and be in the trenches with your franchisees.
There are so many technology platforms and services catering to the restaurant industry that promise higher efficiencies, automation and new revenue streams. How do you as the franchisor make the decision on what technology to implement (think kiosks), costs to be incurred and services to offer that may not be profitable (think delivery) but keeps you competitive? McDonald’s and its franchisees are making the news recently as it relates to the economics of delivery services and its costs. We’ll be discussing best practices of how to evaluate technology options and collaborate with your franchisees.
These are just some of the top issues facing franchisors today. A whole other set of issues exists around legal compliance, which requires the filing of the Franchise Disclosure Document (FDD) and audited financial statements. Click here to learn more about when audited financial statements are needed for the FDD filing. Last, but not least, don’t forget that the new revenue recognition standard is applicable for private companies for 2019. Click here to learn more.
I hope you will join us as we dig into each of the issues above and discuss best practices on how to address them. If you have any questions, please reach out to your Henry+Horne advisor.
Dustin J. Minton, CPA