Comment
The Service Employees International Union and Change to Win hereby submit comments regarding the Franchise Rule. Our comments update a Petition for Investigation we submitted in 2015 in which we requested a comprehensive review and overhaul of the Franchise Rule to address the extreme power imbalance in the franchise model and to make the system more fair and sustainable for the people who bear the costs of this system: franchisees and workers employed in franchise systems.
In our Petition for Investigation, also resubmitted with these comments, we identified five key franchisor practices as the most problematic:
1)incomplete or misleading financial performance representations made to prospective franchisees by franchisors;
2)significant capital investments required by franchisees during the course of the franchise agreement or as a condition of renewal;
3)retaliation against franchisees that join franchisee associations;
4)unfair termination or nonrenewal of franchise agreements and
5)arbitrary denial of franchisees’ requests to transfer the business.
We are submitting two new pieces in our comments: 1) an update of the contractual research we submitted with our original petition, which shows that although there are some minor variations, these typical franchise agreements and the fundamental problems they reflect have not changed or improved in any relevant way since 2015, and 2) an update of franchise issues that illustrate how problems related to the franchise model, as currently structured and regulated, have persisted or worsened in franchised industries since 2015, as follows:
a.the complaints in two recent class action race discrimination suits brought by current and former Black McDonald’s franchisees that illustrate the consequences of oppressively unequal bargaining power and an arbitrary franchise sale and transfer system;
b.the recent history of conflict over capital investments and similar cost issues between McDonald’s and its franchisees that further demonstrates the ultimate control wielded by the franchisor in the franchise system;
c.an analysis of how several companies have attempted to use the franchise system to centralize control and shift risk to franchisees in such extreme ways that franchisees have asserted in litigation they are direct employees of franchisors and, in some instances, even failed to earn minimum wage while working in their franchises; and
d.a review of the ongoing widespread use of no-poach agreements in franchised industries, which hinder competition, harm workers, and distort the labor markets in these industries.
For the reasons stated in our submission, we urge the Commission to utilize the full range of its power to address the imbalance of power and resulting abuses in the franchise relationship. The Commission must at least address the worst abuses: overwhelming and arbitrary franchisor control over aspects of the relationship including terminations, sales, transfers and renewals as well as unfair capital investments required in the course of a franchise agreement; the use and enforcement of no-poach agreements to restrain labor competition among franchisees; and misleading financial disclosures and the inability of franchisees to assert reliance on those disclosures in disputes with franchisors.
Like many Americans, we and the workers we represent are concerned with the increasing concentrations of corporate power in our economy. We view the unrestrained abuses of power by franchisors as a significant aspect of this unfortunate and destructive growth, and we believe it is past time for the Commission to take decisive action to bring about a better and more rational balance between the various participants in our economy. Accordingly, we urge the Commission to use the broadest tools at its disposal to undertake a thorough review of these problems, revise the Franchise Rule to regulate the relationship between franchisors and franchisees substantively for abusive practices, and engage in substantial enforcement action to reveal, penalize – and hopefully deter – current abuses by franchisors.
In our Petition for Investigation, also resubmitted with these comments, we identified five key franchisor practices as the most problematic:
1)incomplete or misleading financial performance representations made to prospective franchisees by franchisors;
2)significant capital investments required by franchisees during the course of the franchise agreement or as a condition of renewal;
3)retaliation against franchisees that join franchisee associations;
4)unfair termination or nonrenewal of franchise agreements and
5)arbitrary denial of franchisees’ requests to transfer the business.
We are submitting two new pieces in our comments: 1) an update of the contractual research we submitted with our original petition, which shows that although there are some minor variations, these typical franchise agreements and the fundamental problems they reflect have not changed or improved in any relevant way since 2015, and 2) an update of franchise issues that illustrate how problems related to the franchise model, as currently structured and regulated, have persisted or worsened in franchised industries since 2015, as follows:
a.the complaints in two recent class action race discrimination suits brought by current and former Black McDonald’s franchisees that illustrate the consequences of oppressively unequal bargaining power and an arbitrary franchise sale and transfer system;
b.the recent history of conflict over capital investments and similar cost issues between McDonald’s and its franchisees that further demonstrates the ultimate control wielded by the franchisor in the franchise system;
c.an analysis of how several companies have attempted to use the franchise system to centralize control and shift risk to franchisees in such extreme ways that franchisees have asserted in litigation they are direct employees of franchisors and, in some instances, even failed to earn minimum wage while working in their franchises; and
d.a review of the ongoing widespread use of no-poach agreements in franchised industries, which hinder competition, harm workers, and distort the labor markets in these industries.
For the reasons stated in our submission, we urge the Commission to utilize the full range of its power to address the imbalance of power and resulting abuses in the franchise relationship. The Commission must at least address the worst abuses: overwhelming and arbitrary franchisor control over aspects of the relationship including terminations, sales, transfers and renewals as well as unfair capital investments required in the course of a franchise agreement; the use and enforcement of no-poach agreements to restrain labor competition among franchisees; and misleading financial disclosures and the inability of franchisees to assert reliance on those disclosures in disputes with franchisors.
Like many Americans, we and the workers we represent are concerned with the increasing concentrations of corporate power in our economy. We view the unrestrained abuses of power by franchisors as a significant aspect of this unfortunate and destructive growth, and we believe it is past time for the Commission to take decisive action to bring about a better and more rational balance between the various participants in our economy. Accordingly, we urge the Commission to use the broadest tools at its disposal to undertake a thorough review of these problems, revise the Franchise Rule to regulate the relationship between franchisors and franchisees substantively for abusive practices, and engage in substantial enforcement action to reveal, penalize – and hopefully deter – current abuses by franchisors.