How upcoming legal cases may change the future of franchises

Are franchises small, independent businesses or should they be considered part of a much larger company?

The question is at the heart of two upcoming legal cases. The outcomes could affect profits and change how franchisees hire, fire, manage and pay workers.

A federal judge holds a hearing Tuesday on Seattle's minimum wage law, which treats franchisees of companies such as McDonald's and 7-Eleven as big businesses although many are owned by individuals and have only a handful of employees. And March 30 brings the first of a series of hearings into complaints against McDonald's Corp. and some of its franchisees brought by National Labor Relations Board officials. The agency's Office of General Counsel contends McDonald's is a joint employer with its franchisees, and should be held responsible if franchisees are found to have committed labor law violations.

When Seattle's City Council passed a law last year raising the minimum wage to $15 from $9.32 an hour, it gave small businesses seven years to reach that level vs. three for large businesses — with franchises considered large businesses.

The law going into effect April 1 is being challenged by franchisees and the International Franchise Association. They're asking a federal judge to stop implementation of parts of the law that treat franchises as large businesses; they contend the law discriminates against franchises.

Franchises are at a financial disadvantage under the law, says IFA President Steve Caldeira. For example, a restaurant franchisee will have to pay higher wages than independent restaurants for four years, he says.

"That's a long time for there to be such an unfair competitive wage situation," he says. "Those businesses might not make it."

Jones worries about losing customers. The higher wage is also affecting the expansion of his own chain, Blazing Onion, which has six locations.

"We are watching Seattle closely, but delaying adding a location in Seattle until we see how this pans out," Jones says.

Franchisees are considered large businesses because they benefit from franchise networks, says Viet Shelton, spokesman for Mayor Ed Murray.

"Franchises have distinct advantages over the typical independent small business — training, product development and marketing support, to name just a few," Shelton says.

Franchise owners wonder whether they'll lose autonomy as a result of hearings into about 80 charges against McDonald's and some of its franchisees.

The NLRB's general counsel contends that McDonald's, through its franchise relationship and business practices, had enough control over franchisee operations to be considered a joint employer of their workers, said Jessica Kahanek, an NLRB spokeswoman. She declined further comment while the cases are being litigated.

McDonald's did not respond to requests for comment. In a statement following the general counsel's decision, McDonald's said it offers franchisees resources to help them manage restaurants, but that does not create a joint employer relationship.

Whoever loses during the hearings will likely appeal to the NLRB. From there, the case would go the U.S. Court of Appeals and possibly the Supreme Court.

The franchise industry is concerned that the cases could set a precedent requiring all franchisers to oversee how franchisees manage employees.

"No business owner wants to take on the risk without the control," says Karim Webb, owner of three Buffalo Wild Wings restaurants in Southern California.

Joyce Rosenberg is a business reporter for the Associated Press.