The franchise industry is on the verge of losing a battle regarding employer liability, as old arguments fail to address new opponents.

Whatever your position on the Obama view of franchising, the reality is that Executive Branch officers are powerful and have wide discretion. As such, franchisors ignore their views at great peril.

A recent article by attorney Harold Kestenbaum made the case that state legislators are able to determine how "employer" is defined under federal law. Presumably Mr. Kestenbaum was being facetious in demonstrating the failure of the International Franchise Association and others to address the concerns of the NLRB and US Dept of Labor, but the large number of industry players who took the article as a serious comment are indicative of just how clueless the franchise industry remains today.

David Kaufmann may lack Mr. Kestenbaum's sense of satire, but Kaufmann's article in the Spring 2015 Franchise Law Journal is a serious attempt to lay out the basis for the threat and a socio-legal defense of the existing jurisprudence. The article is worthy of more serious consideration than can be dealt with in a brief BMM post, and is the starting point not only for an attack on the Obama administration viewpoint but also for a frank discussion of why David Weil is having success.

Kaufmann is blunt in identifying the root cause of the problem, and it is to this point that my comment is addressed.

American political discourse has gone thru many cycles in our history, and we are now in an environment similar to the great Progressive Era of a century ago. As Kaufmann realizes, the impetus is also similar to the last cycle: just as the Gilded Age led to a reaction against inequality of wealth and political influence, the wake of the 2007 financial collapse has led to a reevaluation of economic changes in recent decades.

Most relevant to our concerns, the gap in wages for those at the bottom of the ladder stands out in sharp contrast to the wealth of those at the top. A century ago, this led to some action at the federal level (such as the Sherman Act), but most of the activity was at the state level, and union organizing was in its infancy.

Much as the encyclical Rerum Novarum (1891) led to calls for a "living wage" in the 1920s, religious leaders today are calling attention to the moral aspects of how QSR workers are being treated in 2015.

Politicians are by nature attuned to popular sentiment, whatever the century. Theodore Roosevelt sought to follow Herbert Croly's prescription to achieve "Jeffersonian ends through Hamiltonian means." There are significant differences between Croly and Weil, and Obama is no TR. Yet even starting from a conservative viewpoint (as did Croly and TR), the remedy of David Weil is not without foundation in American politics or jurisprudence.

While the Great Depression marks a break from the Progressive Era, the legislation which resulted (including the creation of the NLRB) was very much informed by the progressive values of the first three decades of the century.

New Deal legislation coupled with the effects of World War II led to the locus of power shifting to Washington and in the wake of Chevron and the practical realities of statutory implementation, our time is one in which the state governments are bit players (with some exceptions such as Eric Schneiderman).

Kaufmann says that if the Obama viewpoint takes hold, then franchisors would be on the hook for increased costs due to the need to comply with Wage & Hour mandates. Costs would increase and franchising could not survive, says Kaufmann.

No doubt Weil would agree and explain that is precisely the point. Costs would increase as employees would have to be paid in accord with statute, and the ability to go after a "deep pocket" would mean that businesses would have to either comply with the law or be sued.

In fact, this is precisely the logic behind NY Attorney General Schneiderman's pursuit of pizza franchisors Domino's and Papa John's.

Kaufman realizes the problem, but he does not propose a solution and spends most of the article formulating a legal argument regarding why "joint employer" theory should not apply to the franchise industry.

Kaufmann makes a respectable case on this latter point, but that is not going to solve the underlying problem, since this is an issue which is every bit as much a public policy issue as a legal one-- and I would argue, more so.

Kaufmann is well aware of the underlying problem and his failure to address it is nothing to hold against him. But as he suggests in the beginning of his article, there is a populist and even a moral aspect to the Weil thesis which needs to be addressed.

We can debate whether the minimum wage was originally intended to be sufficient to live on (it was not), and whether the minimum wage was intended to be the support of full-time workers who are the head of household (again, it was not). We can also debate whether the top of the food chain is getting more than a fair share.

But at the end of the day, the franchise industry is left with a simple reality: the electorate perceives a gross inequality which needs to be rectified. And with every franchise owner who fails to abide by Wage & Hour statutes, and with every franchisor who turns a blind eye to wage theft and taxpayer subsidy of wages, the position of David Weil and the NLRB is going to get a more sympathetic ear.

It is time for the franchise industry to clean up its act, or at least to get through the next Presidential election cycle without suffering a disaster.

Morality aside, there are sound reasons why franchisors should take David Weil and the NLRB seriously-- answering not simply their legal arguments, but their economic arguments and the moral basis thereof.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Authors

Archives

Search for Articles

Follow Us