The Future of Franchise Looks Bright in 2015 - But Is It?

2015 promises to be another great year for the franchise industry — the fifth in a row, in fact, as franchised businesses continue to grow at a faster pace and create more jobs than the rest of the economy. “Franchising is an American success story,” according to International Franchise Association (IFA) President Steve Caldeira, starring “independent, locally owned small-business men and women, including more veterans and minorities.”

According to IFA’s annual state of the industry report prepared by forecasting firm IHS Economics, the franchise sector is expected to see a 5.1% rise in GDP, compared to the 3% growth expected for the overall economy. IFA’s 2015 predictions for the franchise industry include 247,000 new direct jobs added in the United States, up from 235,000 in 2014 — 38,000 in December alone.

There’s Always a But

The IFA’s sunny outlook for the franchise industry in 2015 is somewhat overshadowed by several dark clouds looming on the horizon. Three regulatory issues facing the industry could potentially break the chain of success and cause the growth to stagnate. The big three include a recent controversial ruling by the National Labor Relations Board (NLRB) on “joint employment,” new minimum wage laws and the definition of full-time employees under the Affordable Care Act.

Joint Employer Provisions

In a late July ruling 2014, NLRB General Counsel Richard F. Griffin, Jr. ruled that the McDonald’s Corporation could be considered a “joint employer,” meaning that it could be held liable for wage and labor violations by any of its franchisees. The ruling, if upheld could set a dangerous precedent that could change the whole franchisor-franchisee relationship to one more resembling employer-employee, as franchises would be forced to much more closely monitor and restrict their franchises.

Minimum Wage Laws and Franchise Owners

Another major issue affecting franchise owners is that of new minimum wage laws being enacted in 29 states and D.C., that are above the Federal minimum hourly wage of $7.25 per hour. Of particular concern is Seattle’s minimum wage act, passed in June of 2014. This new law gives businesses employing 500 or more workers just three years to increase wages to a minimum of $15 per hour, while those with fewer employees have seven years to meet the new pay rates. For franchises, the blow is particularly brutal, as the law treats franchises as a single unit, so that many of them will fall under the three-year time frame. As a test case, this is one to watch closely as the IFA prepares for a tremendous legal battle.

Obamacare’s Definition of Full Time Workers

Initially passed in 2010, the Affordable Health Care Act requires large employers to offer health insurance to “full time” workers, defined as those working 30 or more hours per week, as opposed to the industry standard of 40 hours.

Many worried that this would lead to large companies cutting workers’ hours in order to avoid having to foot the bill for health insurance. However, evidence suggests that it has led some employers to cut the hours of workers who were already part-time, to make sure they do not exceed the 30-hour threshold.

One of the first acts of the newly inaugurated 2015 Congress was to pass a bill – modifying the Affordable Healthcare Act to redefine “full-time” as 40 hours per week. The bill now heads to the Senate, where it is expected to pass, however the White House has warned that President Obama will exercise his power of veto if the bill gets that far.

Why?

Because far more Americans already work 40 hours a week as opposed to 30, the Obama Administration believes that raising the threshold would potentially put more workers at risk of having their hours cut.

Think of it this way – some companies are cutting the hours of part-time workers (which represent a significantly smaller proportion of the workforce) to stay below the 30-hour threshold. Should the new bill pass, those same companies may begin to cut the hours of those working 40 or more hours (a far larger group) to avoid having to pay for health insurance since those same part-time workers will no longer be eligible for health insurance anyway.

An Industry Divided

These three issues seem to dividing the franchise industry, pitting franchisors against franchisees in a fight that’s as political as it is commercial. The results of these conflicts, as with their overall effects on the franchise industry, are anybody’s guess. Only one thing is certain: It positively bears watching. This is only Part 1 of the discussion. Click here for Part 2 where we’ll dive into more details regarding the “Joint Employer” decisions and Part 3 where we focus on the legislative battle of the definition of a “full-time” employee and minimum wage.