Not a Member?  Become One Today!

HR Magazine, August 2004 - Franchisors Walk a Fine Line

By Susan J. Wells   8/1/2004
 

HR Magazine, August 2004

Vol. 49, No. 8

Recognizing the importance of people practices at franchised companies means more hands-on involvement of HR.

Franchises are a unique business breed—one that promotes sole entrepreneurship combined with a proven brand name, business plan and marketing strategy. The franchisee may be the arbiter of his destiny, but he has a lot of resources and support from the franchisor to make it happen. The intricacies of this distinctive relationship are set forth in pages of legal documents that spell out exactly what is and isn’t expected of the franchisor and the franchisee.

Traditionally, one area franchisors tended to steer clear of was human resources policies and practices. While franchisors would provide cursory resources for good hiring practices and employment law requirements, creating an “employment brand” usually was left to each franchisee. Why? Because dictating the employment practices of individual franchisees might hold the franchisor liable for any wrongdoing committed by the franchisee. Better safe than sorry was the rationale.

That was then; this is now.

There’s fresh evidence that some franchises are taking an increased interest in—and more responsibility for—encouraging and ensuring best practices in employment matters.

“There was a time when the franchisor would remain fairly neutral on many human resource issues, except perhaps to guide the incoming franchisee to a book or other resource to find hiring guidelines,” says Mariel Miller, vice president of the Franchise Business Division at Caliper Corp., an HR assessment and consulting firm in Princeton, N.J. “Franchisors are coming to grips with the fact that building a successful, long-term business has much more to do with creating a culture and distinguishable workforce than with transactional sales.”

With increasing competition from similar brands, new concepts entering the market faster and existing systems copied from fast-growing startups, franchisors are recognizing that their competitive edge will be their workforce, Miller says. “They are beginning to realize that it is the people who make or break the franchise,” she says. (For more information on the market size of franchises, see “Franchises: Collective Might”.) Recognizing that people policies contribute to the success of a business is good news for HR at franchised companies. But it’s not as simple as it seems. Franchised companies still walk a very fine line: They must maintain employment brand consistency throughout their franchisees but without actually mandating or directing specific personnel practices in an effort to minimize their legal liability. (For more information on this legal high-wire act, see “A Matter of Control”.)

For HR at franchised companies, this means an inherent tension between being hands-on in the spirit of the culture and employment practices, and being hands-off in the day-to-day operations. Here’s how some companies are walking that fine line.

Aiming for Hiring Success

Dual goals of maintaining fast-paced growth and boosting the success rate of all its franchisees led Keller Williams Realty International, a real estate company with the fifth-largest number of agents in North America, to identify the key positions in its franchises and to help franchise managers do a good job of filling these positions.

The Austin, Texas-based company identified three key positions—the operating principal, sales manager and office administrator—and then created its “career visioning” hiring system. The system guides franchisees through a detailed four-stage selection process that includes behavioral assessment, interviews, discussions of job descriptions, references and transition issues. The goal is to ensure that the skill sets and motivation of these primary players meet the core requirements of the job.

“We require our franchisees to be more diligent in how they choose and develop their staff,” says Dave Jenks, vice president of Keller Williams, which currently counts more than 300 franchisees and 28,000 real estate agents.

To help do that, the company includes in its franchise agreement the right to review the qualifications of any hire in those three positions, Jenks says.

“It’s not an endorsement,” Jenks is quick to point out. “It’s a measure that we use to say that a person meets our minimum standards. We don’t hire or fire for our franchisees, and the ultimate action lies with them. But we outline, guide and train them how to do it.”

This type of preapproval process for key posts has paid off, Jenks says. “It leads to a wonderful level of scrutiny and high-quality hires as a result,” he says. “Because the franchisee knows that they will have to defend their choice, they have to really do their homework by establishing who they want to join the team and why.”

The idea, Jenks says, is to take a collaborative, but not controlling, approach to franchisee leadership. That in turn helps give each office a better chance for success, which ultimately rewards the company. “In any type of business, if you make sure you’re doing business with and engaging the right people, you’ll automatically minimize legal issues,” he says. The company also paid out more than $13 million to agents last year in a profit-sharing program that bases monthly distributions on the performance of agents that franchisees have recruited to join the company. The model for this program is different from those used by most franchises—particularly in real estate, in which a considerable amount of agents’ compensation is commission-based.

Maintaining the Employment Brand

Because franchise systems often encompass a wide network of franchised locations, presenting a common face to all employees and customers is critical. And when your company is the world’s largest quick-serve restaurant company (in terms of system units), integrating HR strategies is a sizable goal.

To help maintain and promote a unified employment brand among its many units—which include A&W-All American Food, KFC, Long John Silver’s, Pizza Hut and Taco Bell concepts—Louisville, Ky.-based Yum! Brands Inc., has formalized recruitment, staffing, training and ongoing support programs for franchisees.

“Since the company was formed in 1997 [as a spin-off from PepsiCo], our goal has been to leverage our scale and employ a ‘one-best-way’ approach to everything we do,” says Valerie Davisson, vice president, human resources. “Prior to that, each brand had its own set of programs, and there was a lot of duplication.”

To accomplish this, Davisson says the company put process and discipline behind critical HR issues and created Yum! University, a training vehicle where it teaches best practices in HR, operations and marketing.

The company also created a dedicated employment marketing function—one of the first companies in the industry to do so, according to Davisson. This position “helps provide a holistic view and gives us a competitive advantage in attracting, recruiting and retaining the very best candidates for our positions,” she says.

In addition, Yum! has developed an overall employment campaign that maintains, shares and standardizes all employment advertising, recruiting, application and orientation materials in its more than 33,000 restaurants in 100 countries and territories worldwide. Yum!’s “great place to work” strategy uses multiple channels to communicate its employment message—through in-store efforts, classified ads and employee referrals to its new career web site, Davisson says.

The company lends guidance and oversight to its 1,500 franchise partners (80 percent of its restaurants are owned and run by franchisees) by setting the guidelines, creating the strategies, and providing training tools and ongoing support. “We’re constantly analyzing and benchmarking our success as a system,” says Davisson.

Yum!’s efforts have brought measurable results.

“Consumer compliments are up, and turnover is down. We had a target of 130 percent team member turnover; however, we ended 2003 with a low of 113 percent turnover,” Davisson says. “We’ve achieved the lowest turnover in the industry.” The industry average for turnover is about 200 percent.

Training Means More

In the franchise context, employee training has taken on greater meaning. The reason: Ensuring that everyone in the franchise system has the necessary skills to operate according to the brand’s standards simply demands it, experts say.

“One of the key elements that makes franchises successful is consistency in training,” says Marla Rosner, director of training and employee development in the San Rafael, Calif., office of Michael H. Seid & Associates LLC, a franchising advisory firm based in West Hartford, Conn. “Training is the vehicle for franchises to maintain their culture and brand.”

At Great Clips Inc., a hair care salon franchisor in Minneapolis, training, learning and continuing education—for both stylists and management staff—is a big focus for its 950 franchisees.

The company, which franchises all of its salons, has experienced fast growth—from 838 locations in 1996 to 2,052 in 2003. It expects to add another 253 salons this year. That rapid expansion makes guiding and executing training initiatives critical to produce bottom-line business results, says Mari Fellrath, senior vice president of franchise services and human resources at Great Clips.

In programs that are created at corporate headquarters but delivered by field employees, the company requires all stylists to attend a three-day Great Clips Academy for Hair, and management staff must attend a seven-day management training series.

“Franchisees are required to attend a five-day franchisee orientation and training program where they spend one entire day on human resources-related topics—like recruiting, management selection, compensation and benefits, protecting your business, and industry relations,” Fellrath says. In addition to manager/franchisee meetings three times a year in each market, along with an annual convention, the company also holds what it dubs “institutes” for franchisees and general managers, which are two-day seminars focused on a specific topic. The topic of last fall’s seminar? Managing human resources, Fellrath says.

“We develop the training materials, workshops, videos and so forth at the home office, and these are delivered in the field,” she says. “We have a lot of training resources for our franchisees to use that are focused on self-education.”

To judge HR quality and effectiveness, the company tracks turnover in its franchisees’ salons on a voluntary basis, Fellrath says, “which is a great indicator in our business of HR practices.” It also tracks customer feedback received in the salons and employee complaints. “And we provide our franchisees with audit tools and many other resources so they can audit their own HR practices,” she says.

In addition, Fellrath periodically visits Great Clips markets and delivers workshops to franchisees and general managers, mainly on employment law, culture and management development. The company also employs tools and resources for its franchisees to use in their organizations, including standard HR documents such as job descriptions, a recommended compensation plan, policy manual, performance review forms, orientation manuals and check lists.

Yet the company is careful not to direct the employment practices and management of franchisees’ staff. “We do not get involved in any direct management of employees, any termination meetings, or in any pay or benefits decisions. Franchisees determine their own employment practices; we don’t set these for them,” Fellrath says. “While we provide resources and guidance, the ultimate decision is up to the franchisee, as it’s their business and their employees.” (For more information on minimizing legal exposure, see “Minimizing Exposure”.)

Programs, resources and strategies that help bring consistency and strength to the employment brand—and that go above and beyond the traditional and basic—are “more common today in franchising than ever before,” Caliper’s Miller says. “Many franchisors want to take more responsibility for supporting the growth and profitability of their franchisees. They simply cannot do this without a serious effort to upgrade HR best practices.”

Susan J. Wells is a business journalist based in the Washington, D.C., area with nearly 19 years of experience covering business news and workforce issues.

Copyright Image Obtain reuse/copying permission
 

 Articles

 

A Matter of Control

Although franchisees operate as separate businesses, plaintiffs often look to the deepest pockets when developing a claim—which means franchisors are frequent targets for suits.

“The average plaintiff’s lawyer is going to try to go after both franchisor and franchisee,” says Andrew J. Sherman, senior partner and head of the franchising, licensing and distribution practice in the Washington, D.C., office of McDermott, Will & Emery. “This doesn’t mean that the franchisor’s going to be liable every time, but it does warrant the franchisor be aware of that exposure.”

In nearly every case, liability hinges on how much control the franchisor holds over its franchisee. A franchise has an independent nature, but a franchisor must by necessity retain some control over the use of its names, goods or services. The more control, the more legal risk.

When determining liability, most courts look at whether the franchisor had the right to control both the means and details of the process used by the franchisee to run the business. For example, courts have let franchisors enforce specific standards that help achieve and maintain quality systemwide—as long as they do not control “the time, manner and method of performing daily operations,” says Joseph Schumacher, chair of the franchise and distribution practice group at the Philadelphia law firm of Wiggin & Dana LLP.

Two recent cases shed light on how the legal border is drawn between franchisors and franchisees.

In Wisconsin, an employee of an Arby’s fast-food franchisee left his shift early, then shot his former girlfriend and her fiancé. The fiancé died; the former girlfriend was left permanently disabled. The employee then shot himself. The victims’ families sued the franchisee and the franchisor, alleging negligent hiring and supervision of the employee.

The victims argued that a franchisor is liable if it maintains a “right to control” the daily operations of the franchise. The franchisor contended that responsibility would exist only if it had “actual control” over the activities that caused the negligence claim—in this case, the franchisee’s HR practices.

The state court of appeals agreed that franchisors aren’t liable for franchisees’ actions merely because the franchisor has some degree of control over the franchisee. In this case, the license agreement stated that the franchisor directed the franchisee to “hire, train, maintain and properly supervise sufficient, qualified and courteous personnel.” The court said this language didn’t give the franchisor the right to control personnel issues at the franchised location. The franchisor didn’t influence hiring, supervision or firing of employees, so it couldn’t be held liable for the franchisee’s negligence. (Kerl v. Rasmussen Inc., Wis. Ct. App., No. 02-1273, 2003.)

In Florida, a Stanley Steemer employee struck a vehicle while driving the franchisee’s van, killing the driver of the other vehicle. The employee’s driver’s license was suspended prior to the crash.

The victim’s wife filed a wrongful death suit against the employee, the franchisee and the franchisor, alleging that Stanley Steemer was liable for the negligent act of its franchisee’s employee.

An appellate court reversed a lower court ruling in favor of the franchisor. Even though the franchise agreement said the franchisee was an independent contractor, not an employee, the court said the relationship depends on the nature and extent of the franchisor’s control as defined in the agreement or “by the actual practice of the parties.”

Among the aspects of the franchise agreement that raised questions about the amount of control the franchisor had over its franchisee: Stanley Steemer required approval of all advertising in advance, mandated strict adherence to cleaning methods and required purchase of the latest cleaning machines. (Font v. Stanley Steemer International Inc., Fla. 5th DCA, No. 5D02-1340, 2003.)

Franchises: Collective Might

Nationally, franchises wield considerable economic power. Franchised companies—and their franchisees—rang up nearly $1 trillion in annual sales in 2001, according to the latest data available from the International Franchise Association (IFA) in Washington, D.C.

Those sales were generated from 767,483 franchised establishments, which provide 9.8 million jobs and employ 7.4 percent of the nation’s private-sector workforce, the IFA says. Their annual payrolls reach $229 billion—or 5 percent of all private-sector payrolls in the United States. One of every 12 retail establishments is a franchised business.

Minimizing Exposure

According to employment and franchise law experts, there are several steps franchisors can take to minimize liability for franchisee actions.

  • Avoid control of daily operations and procedures. For example, a franchisor can specify that a franchisee must keep shop floors clean without fear of vicarious liability. But if the franchisor dictates or controls the way a franchisee keeps the floors clean, it could raise the likelihood that the franchisor may be held liable for the condition of the franchisee’s shop floors.
  • Specify in franchise agreements that licensing decisions are based solely on the franchisees’ ability to meet quality standards.
  • Inform franchisee employees the franchisor is not their employer and establish clear policies dictating the scope of interaction between the franchisor and franchisee employees.
  • Conduct periodic audits of policies with legal counsel. “Sometimes, poor HR practices can be indicative of other problems in the management of the facility,” says Andrew J. Sherman, senior partner and head of the franchising, licensing and distribution practice in the Washington, D.C., office of McDermott, Will & Emery.
  • Be careful when doing field support. Train employees to understand the differences between required standards and required procedures. “Field reps need to be trained on how to make recommendations on improving a facility during visits—without micromanaging the business,” Sherman says. Ask yourself: “In their zeal to fix a problem, will they expose the franchisor to liability?”
  • Avoid setting compensation and benefits. Clearly communicate when recommendations on these issues are only suggestions and not requirements. The final decisions must be made by the franchisee. And make clear that employees are being paid by the franchisee, not the franchisor.
  • Require franchisees to post a notice that they’re operating the business as an independent franchisee.
  • Consider mandating that franchisees have adequate liability insurance that includes employment practices liability coverage.


Sections