Big Business and Big Government Are Teaming Up to Crush Restaurant Franchisees

F or decades, the franchisor-franchisee model has been a driver of productivity, jobs, and economic growth for our country. It has also been a reliable source of opportunities for Americans from all backgrounds to become business owners and entrepreneurs in pursuit of the American Dream. Congressman Kevin Hern (R., Okla.), for example, will proudly tell you about how he started with less than nothing and used McDonald’s franchise ownership to become an independently wealthy man. He now helps write tax laws from the House Ways and Means Committee.

The model is simple: A franchise owner opens a restaurant and agrees to a series of rules the name-brand company imposes. These include where to buy food and equipment, how to conduct business, what the stores should look like, etc. But these franchises are independently owned and operated. Your local burger joint is not run by Dave Thomas’s estate, but by a small-business owner you’ve never heard of.

In January of this year, the U.S. House of Representatives passed a Congressional Review Act resolution to rescind a rule from the National Labor Relations Board (NLRB) that exposes franchisors to additional regulatory scrutiny. The NLRB-proposed rule would expand the joint-employer standard, a federal guideline that helps to determine whether a franchisor — together with its franchisee — is also an employer of the workers working at franchise locations.

If a franchisor is considered a joint employer of these workers, that company will face more regulatory oversight on overtime, paid leave, Obamacare mandates, etc. A company deemed a joint employer is legally obligated to bargain with Democratic Party–aligned labor unions (the real point of the NLRB action). In short, being a joint employer means more government regulation and less job creation.

The House decision to reject the expanded NLRB’s rule from October 2023 was cheered by franchise groups and industry stakeholders such as the International Franchise Association (IFA) and the U.S. Chamber of Commerce. The next step is for the Senate to vote on this resolution, which will likely not occur anytime soon.

Until Congress finalizes its decision on this rule, its implementation has been delayed by federal courts. Some brand companies, however, are fanning the flames of this bad idea through questionable business practices that seem to justify NLRB’s action, at least in the minds of those in the Biden administration who dislike the franchise structure and seek to regulate it out of existence.

In Florida, for example, Burger King — operated by Restaurant Brands International (RBI), which is owned by the private equity firm 3G Capital — was sued by one of its biggest franchisees in the state for allegedly forcing the closure of locations because Burger King violated terms of the contract, raised costs, and even stopped delivering supplies to these stores. Similarly, Burger King coerced another major franchisee in the state to sell its stores through a federal bankruptcy court order. Another franchisee under RBI in Texas sued the franchisor for “bullying” the former into selling its locations by terminating the franchising contract between the two parties.

The actions of these heavy-handed franchisors are giving ammunition to those who hope to kill the franchise model by arguing that the franchises are not really independent. Private-equity firms that own the franchisor brands are taking actions that are creating greater long-term risks for their business partners, the franchisees. They are playing into the hands of the real enemy, labor unions and big government.

Franchisors that force sudden closures or changes can draw unnecessary attention from regulators who are alerted by workers who file federal complaints. We have already seen this happen in the last several years, when unionized workers from Trader Joe’s and Starbucks filed NLRB actions in retaliation against their employers and solicited action from regulators that cost these brands millions in legal fees.

If these franchisors continue to power-trip against their own franchisees, they risk becoming targets of scrutiny that federal regulators will not ignore. The joint-employer standard is one ongoing example of why franchisors should respect their franchisees and the decentralized business model. To avoid the government breathing down everyone’s necks, the franchisors must stop micromanaging practices and respect the autonomy of the franchisees they partner with.