April 26th, 2016
Wisconsin law clarifies employer relationship for franchises, shields corporations from lawsuits
A bill quietly passed in the waning weeks of the legislative session and signed by Gov. Scott Walker last month shields corporate franchisers from liability for violations of labor law — a move the franchise industry says protects small business owners and the integrity of the franchise model but one that labor unions say hurts workers.
The question of who is considered an employer and in what context has been asked nationwide, as courts and state legislatures seek to clarify who should be responsible (and therefore have to pay) for labor protections including workers’ compensation and unemployment insurance in an economy increasinglyshifting toward independent contractor and franchise business models.
A franchiser is the larger corporate company that owns the rights and trademark of the company. The franchisee is the local version of that business owned by a local business owner who has a contract with the franchiser.
Wisconsin is one of seven states that recently passed a law excluding a franchiser from being considered the employer of individuals working at franchises. The law clarifies that corporate franchisers are not responsible for workers’ compensation, unemployment benefits, enforcing minimum wage, employment discrimination and wages.
“We as a franchiser view it as a very good bill,” said Phil Keiser, CEO and president of Culver’s, one of the largest Wisconsin-based fast food chains, with corporate headquarters in Sauk City. “In our area, anytime somebody gets into business for themselves, part of the reason they get into business is to do their own thing. We provide them a business model, a brand, but from there on, they want to be their own people.”
The law is a response to a decision last August by the National Labor Relations Board to change its longstanding standard for determining the employer relationship between workers, local franchisees or subcontractors and corporate franchisers. The board, an independent federal agency focused on employee rights, found that the franchiser and franchisee can be considered “joint employers” if they exert indirect control over working conditions and have traditionally been considered employers under common law.
The ruling has caused an uproar in the franchise industry, which says the NLRB upended more than 30 years of precedent in which franchisers were considered employers only if they directly controlled the terms of employment over local franchise owners. The International Franchise Association, an advocacy group based in Washington, D.C. that represents both franchisees and franchisers, has aggressively pushed back, lobbying legislatures nationwide, calling the new “joint employee” standard an “existential threat” to franchising.
According to the group, there are 15,353 franchise establishments in Wisconsin which have produced 177,100 jobs. Franchising nationwide accounts for about 3 percent of private sector Gross Domestic Product and continues to grow, according to IHS Economics.
“A franchisee is in business for him or herself. They hire the folks, they fire the folks, they decide what the pay is, what the benefits are. People don’t decide to become franchisees to be store managers or general managers along with their franchisers as joint employers. That’s not how the model works, that’s not why people do it,” said Jeff Hanscom, director of state government relations at the International Franchise Association, who says he worked with Assembly and Senate lawmakers, Gov. Scott Walker’s office and officials from the Department of Workforce Development on the bill.
But corporate franchisers should assume responsibility for making sure their franchisees and other subcontractors uphold labor law standards, said Stephanie Bloomingdale, secretary-treasurer of the Wisconsin state AFL-CIO. The law is bad for workers and limits their legal recourse when companies don’t treat them fairly, she said.
“These big corporations, which are holding all the profits, are not being held responsible for upholding the laws of the land and workers get the short end of the stick on this,” she said. “The NLRB did the right thing for workers and Scott Walker reversed that.”
Union groups have also criticized the laws as another attack on collective bargaining, limiting the ability of workers to organize and bargain with a corporate franchiser.
Under Wisconsin’s new law, a franchiser is considered an employer only if the franchiser agrees to the role in writing, or the state finds the franchiser to hold distinct and extraordinary control over a franchisee. Texas’ law was used as the model for Wisconsin’s law. The American Legislative Exchange Council (ALEC) adopted a policy in 2011 opposing any laws that would classify franchisees as employees of franchisers. The law, Act 203, was signed with 58 other bills by Walker on March 1, and took effect immediately.
Texas, Utah, Tennessee, Louisiana and Indiana have passed similar laws. A bill is waiting to be signed by Georgia’s governor and one is being considered by the legislature in Oklahoma. Wisconsin’s bill was authored by Sen. Chris Kapenga, R-Delafield.
“With the passage of the Franchise Protection Act, Wisconsin is sending a strong message that we believe the current standard should remain in effect, so franchises can have the certainty needed to grow and hire more employees,” Kapenga said in an email.
Each franchiser’s business model and franchisee contract is different, but most franchisers do not provide human resources services and do not prescribe wage standards or health care benefits to franchisees. Culver’s, which has 566 restaurants across 23 states, and has 134 restaurants in Wisconsin, depends on local franchise owners to uphold federal and state labor laws.
“We explicitly state it is all their responsibility to hire their people with wages and benefits and what else they do to manage their business,” Keiser said. “We have an owner-operator model. … We are basically a collection of mom and pop, small, family businesses. We have no way of knowing who they are hiring in Twin Falls, Idaho.”
Jim Nonn, who owns three Culver’s franchises, located in Dodgeville, Mt. Horeb and Cross Plains, said he is solely responsible for growing his business, paying insurance and maintenance costs, setting wages and maintaining banking relationships.
“Without a doubt there are advantages to being part of a franchise independent business versus being an independent business owner in that we have a very knowledgeable resource in our franchiser who can help us when we have difficult decision to make,” he said. “It is good to see that our business can continue to run independently.”
“At the end of the day, we as franchisees are responsible for our business. It is clear to me that there never was an employer-employee relationship,” Nonn said.
The International Franchise Association is also working on a federal version of the bill, which would clarify the franchisee/franchiser relationship and delay implementation by federal government of the NLRB ruling.
“This will continue to be a goal of ours moving forward in 2017 and beyond,” Hanscom said.