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UCOMM Ed: Franchise Agreements

Understanding how they work and are executed is key for union leaders

Rachel Cossio's picture
May 31, 2017

The definition of a franchise differs from state to state, but as outlined by the Federal Trade Commission (FTC), a franchise is a method for expanding a business and distributing goods and services through a licensing relationship. The best way to think of a franchise is a chain of branded businesses. A franchise generally exists between a well-known company like McDonald’s, the franchisor, and someone who wants to open a franchise, or a branch of the store that is not controlled by the company.  In exchange for the right to use the companies brand and to receive support from the company, the store pays a royalty back to the company.

A franchise agreement is a legally binding contract between both parties that outlines the specific duties to be performed by each party and what compensation is to be expected. The agreement is designed to protect the franchisor’s intellectual property and create consistency in how each franchise operates under the brand. Examples of commonly known franchises include McDonald’s, 7 Eleven, Hertz, Marriott International, Dunkin’ Donuts, Ace Hardware Corporation, Supercuts, UPS and H&R Block. Big companies use this model to expand without needing to monitor the day to day operations of thousands of locations.  Recently though, states and courts have tried to hold the franchisors accountable when their franchisees screw up.  Notable cases include Liebeck v. McDonald’s Restaurants where the company was found at fault for creating a standard coffee temperature that was too hot. McDonald’s has also been sued under joint employer rules when franchisees have failed to pay their workers. In 2016, McDonald’s settled a $3 Million case after their corporate entity as well as their franchisee was sued for back wages. 

Municipalities can also issue franchise agreements.  These are often used to give utilities the right of way to build on public right of ways.  In these agreements, instead of paying a royalty back to the city, they often have to meet certain requirements.  In many cities, these include hiring locally and paying their workers a set wage. In cases like the Spectrum strike in NYC, the city is able to exert some power over the company by threatening to take away their franchise agreement if they don’t end a labor dispute that disrupts vital services.

These franchise agreements are used by both companies and local governments to expand and exert their control.  When done correctly, they can expand the company’s profits and ensure that a public good is being met. When done wrong, they can allow multi-national corporations like McDonald’s and Spectrum to escape their duty to fairly compensate their workforce.

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