What Should the Franchisor Control?

There are two issues regarding Franchisor control that have bubbled under the surface for a number of years and are now beginning to become significant to Franchisees and Independent Franchisee Associations alike.

Since a Federal judge ruled that Coverall North America must pay triple damages to hundreds of workers misclassified as franchisees instead of employees, everyone in franchising is now aware of the dangers of a franchisor who has too much contractual control.

The control issues are:

1. Operational Control

2. Supplier Control

Not coincidentally, these issues have become more prevalent and evident with the advent of strong Independent Franchisee Associations.

As the Franchisors continue the erosion of certain aspects of a Franchisees Business as well as the ability of an Association to exist, they may experience some dire consequences if not careful.

Note the simple graphic below:

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Independent Operator Independent Contractor Employee

The scale above represents at the furthest left hand point, the ability of the Franchisee to do what ever he/she wants with very little direction from the franchisor. At the furthest point on the right hand of the scale represents the Franchisee as strictly employee and no other distinction.

The 'window' (represented by the brackets on the line) shows where the Franchisor has been on the scale.

Operational Control

The Franchisor has the exclusive rights and fiduciary duty to protect its Trademark and Brand. This certainly includes standards of operations, protecting trademarked signage, logos and products.

Franchisees sign an agreement with the Franchisor with the expectation that the Franchisor is an 'expert' ith the chosen field. "The Franchisor's Plan" will change according to the market place.

Franchisees should also enter their agreements knowing that reinvesting in the business reasonably will be a part of keeping up with the competition.

The graphic above is now showing a much different picture. The "window" is gradually and some cases dramaticlly toward the right side of the bar and is being driven by actions on the part of the Franchisor. In the case of some franchised systems, becoming a franchisee is no more that purchasing a job.

As these sifts to the right of the 'line' continue to occur, it is incumbant upon Franchisees and their Associations to become extremely aware of the State and Federal guidelines that determine whether the Franchisee is truly an Independent Operator, and Independent Contractor or an Employee.

It is very tempting in the current employment environment which features legislation such as the Fair Pay Act, Insurance Reform, Employee Free Choice Act (not yet passed and somewhat on the back burner) and others for not only Franchisors, but Small Business in general to attempt to avoid compliance by classifying their workers as Independents.

They are not only relieved of the legal issues, but don't pay FICA, Workers Comp, Unemployment Insurance and the like. There is only on small problem; It's Illegal!

These issues that have been brought to the forfront regarding the Coverall case as well as the Federal Express Drivers complaint.

Supplier Control

The issue of supplier control rests squarely on one question; "Does excercising strict controls over certain products and services protect the Brand and the Brand Image?"

The Franchisor's supply chain management in most systems have standards, supplier facility inspections, quality control metrics (checked frequently from the manufacturer) and the ability to protect itself from fragmentation, inconsistency and dereliction due to inferior or harmful products.

The Franchisor's supply chain management team must be allowed to exercise control over products which would destroy a brand if due diligence were not done.

It is in the best interest of all Franchisees to forbid the use of products that would harm customers or in some cases cause death.

However, what seems to be occurring is a not so subtle choice on the part of Franchisors to 'grab' control of products and services that have nothing whatever to do with Brand protection and the avoidance of harming the consumer.

Newsletter, work shoes, floor mats, individual websites, certain forms of business insurance and other have all been grabbed by the franchisor.

For individual Franchisees and particularly for the Independent Associations, the willingness of the Franchisor to take control of these items has encroached on the remaining ability of the operator to influence their own unit economics and have taken away from the Associations a very important source for funding.

You will see more information in the very near future as well as collaborative solutiuons in the future.

More and more issues surrounding Franchisor control will continue to be brought to light and we intend to keep you informed and even look at actions that can be taken in the future.

(This is a reprint and update of an article the late Steve Ellerhorst wrote 3 years ago, and it still rings true today.)

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