Defining Moments that Changed Franchising in 2017

By just about any measure, 2017 was a transformative year for business. Political shifts, and the resulting market responses, have made for a drastically different business climate this year. And the impact of those changes has certainly been felt in franchising. The International Franchise Association’s Franchise Business Economic Outlook for 2017 outlined both positive and negative impacts on the industry, but it presented a hopeful tone for the year from legislative changes that were expected to be far more favorable to franchise operation and growth.

The total number of franchise establishments was predicted to increase by 1.6% in 2017. Franchise employment was forecast to grow 3.3% in 2017. And franchise output was predicted to be up 5.3% in 2017 thanks to a more stable labor force in the South and West and the addition of strong population and income growth in Sun Belt states. New leadership at the Department of Labor and in Congress was projected to result in a significant shift in the regulatory environment that would ultimately benefit franchise businesses.

But, the study also cautioned that challenges remained from things like growing online data security threats and the proposed implementation of President Donald Trump’s outlined immigration policies, which could pose a threat to employment growth for many franchise businesses.

It turns out that the outlook wasn’t far off. Below are the Top 5 major moments in 2017 that helped to define franchising’s direction for the New Year ahead.

Joint Employer Mandate Roll Back

Franchising’s push to overturn the National Labor Relations Board’s (NLRB) joint employer decision in the Browning-Ferris Industries case took a major step forward in 2017 with the July introduction of H.R. 3441, known as the Save Local Business Act. It represents one of the biggest steps toward fixing what many in the industry have called an “existential threat” to the franchise business model from the NLRB’s decision.

H.R. 3441, which passed through the House of Representatives in October and now awaits action by the Senate, clarifies that two or more employers may be considered “joint employers” only if they have “actual, direct, and immediate” control over employees’ essential terms and conditions of employment. That would reverse the newly adopted NLRB standard that could hold franchisors liable for a franchisee’s employees.

The Senate is expected to debate the issue in early 2018.

Tax Reform

Perhaps the biggest legislative moment in the second half of 2017 was the introduction of H.R. 1, the bill marking the first comprehensive set of U.S. tax reforms in more than three decades. The International Franchise Association (IFA) applauded the introduction of the bill, known as the Tax Cut and Jobs Act, and pledged to actively help shape its outcome.

“Today is a great day for the 733,000 franchise businesses and their 7.6 million employees nationwide,” said IFA President and CEO Robert Cresanti when the bill was introduced. “Few realize that behind the well-known name brands, there are small business owners that are struggling as a direct result of the expensive and complex U.S. tax code. Small businesses are the true engine of the U.S. economy, and when they prosper, the effects are felt throughout every sector. With a lower tax rate and a less complicated code like the House has proposed, small business owners will be more competitive, they’ll be more likely to expand, and, most importantly, they’ll hire more employees.”

Initial modeling suggests H.R. 1 would have impact on both larger C-corporations, who can currently face double taxation at both the corporate level on net income and on shareholders when profits are distributed and on S-corporations, who are pass-through tax entities that pay no income tax at the corporate level, instead passing them through the business and reporting them on the owners’ personal tax returns. S-corps now make up approximately 75-80 percent of franchise businesses in the U.S.

Though first-run modeling data shows a higher potential reduction on C-corps and a smaller potential reduction on S-corps, a myriad of factors, including property ownership or leasing terms, can significantly influence the legislation’s ultimate impact. Experts also caution that the proposal is still likely to shift and any final action isn’t likely until early 2018, or potentially longer.

As the initial debate over the proposal begins, all sides should agree: it is critical for the franchise community to continue to clearly convey its top priorities and concerns.

A New Secretary of Labor

Seven months removed from withdrawing his nomination as labor secretary, former CKE Restaurants CEO Andy Puzder said what happened to him was the result of the opposition party wanting to “knock an incoming president off his game.”

Puzder, who was initially supported by the franchise industry as President Donald Trump’s pick for U.S. secretary of labor, pulled out of the process in February as his business record was attacked by opponents who cited his criticism of minimum wage increases and other worker protections.

Following Puzder’s withdrawal from consideration, President Trump nominated Alexander Acosta for the post, who was sworn in as the 27th United States Secretary of Labor in April.

Acosta is an accomplished attorney who served in three presidentially appointed, Senate-confirmed positions, including as a member of the National Labor Relations Board, where he participated in or authored more than 125 opinions.

“Acosta has shown the appropriate balance needed to protect the interests of employees and employers,” said Matt Haller, Senior Vice President of the International Franchise Association told Buzzfeed News, following his confirmation. “Franchise owners around the country are facing a great deal of regulatory uncertainty as a result of the wreckage created by the previous administration's out-of-control Department of Labor. [Acosta will] address the regulatory issues facing the franchise model quickly."

SBA Loan Changes

Small Business Administration (SBA)-backed loans have long been an important source of funding for many franchisees, but over the last few years, the system has seen significant shifts. Changes negotiated in 2017 that take effect on January 1, 2018 could once again put franchisees at a disadvantage to other small businesses because of how the SBA views the affiliation between franchisors and franchisees.

Certain provisions that are common in franchise agreements could be viewed as overly restrictive on a franchisee’s right to independently reap a profit from its business and create an affiliation between franchisor and franchisee. The SBA then views the franchisor and franchisee as one economic entity, often disqualifying the franchisee from SBA-backed lending. The affiliation issue is typically overcome by amending the franchise agreement on the points that create “affiliation.”

Franchisors whose franchisees are interested in SBA-backed lending need to take some new steps to ensure that this resource will still be available to their franchisees. That includes ensuring that they are listed on the SBA’s registry and that the registry correctly identifies the form of SBA addendum they will be using. Franchisors who use a negotiated addendum that has changed or franchisors who will be changing their franchise agreement will have to resubmit the agreement to the SBA for review.

The Continued Rise of Online Security Concerns

Online data breaches continued to make headlines in 2017, and the franchise industry was not immune to the impact. For franchisees, data breaches can be particularly concerning, even if they occur elsewhere in the franchise system. That’s because the average consumer considers a corporate brand and a franchise location as the same entity. So, any breaches to online information tend to affect the entire system’s brand.

That means it is incumbent upon franchisors to be prepared. It’s important to have a well thought out crisis response plan in place. Consider seeking expert help to create a comprehensive public relations action plan to help manage a potential information breach situation and you could save your brand a lot of headaches in the long run.