News Briefs

Franchisee Satisfaction Survey Points to Disconnect

The first National Franchisee Satisfaction Survey, released by Franchise Facts in January, paints a bleak picture of franchisee profitability, satisfaction, and franchisor relations, and it concludes that franchisors have a long way to go to improve relations and support of their franchisees.

“Franchisees have had an exceptionally difficult year ' possibly the worst of their working lives. National Franchisee Satisfaction Survey respondents report that few are meeting their financial goals, seeing increased revenues/profits or would consider recommending their current franchise to a prospective franchisee. The vast majority [84%] do not expect to be with their current franchise in five years time,” the survey states.

The survey, which was three years in the making, attempts to deepen the understanding of franchising from a franchisee's perspective, said Perry Shoom, president of Franchise Facts (www.franchisefactsusa.com). With better information, he believes that franchisors and franchisees can improve relations, operations, and brand success. “What has passed for research in the last few years ' in franchising and in other industries ' has usually been done by companies to support their marketing claims,” he said. “We are taking research back to its roots. This is research that a company can act on.”

A sampling of specific findings underlines the depth and breadth of franchisees' concerns:

• 15% of franchisees feel that their franchisors provide good support (pre-opening, opening, and ongoing);
• 18% of franchisees feel that their franchisor is concerned with local store profitability;
• 14% of respondents feel they have a good relationship with their franchisor; and
• 16% of respondents would recommend their current franchise to a prospective franchisee.

Franchisees declared similarly low levels of satisfaction with ongoing training and marketing, the caliber of vendor programs they are offered, and even their franchisor's understanding that “I must be successful for them to be successful.”

However, Shoom points out that franchisors should not necessarily expect very high satisfaction ratings across large populations of franchisees. “I don't think it's realistic that any franchise would see 80% franchisee happiness or that 90% of franchisees are satisfied with their financial success,” he said. “In dealing with businesses that are diverse, if you could hit 50% satisfaction, that would be good.”

Perhaps the biggest takeaway for franchisors, according to Shoom, is the high percentage of franchisees who say that they do not expect to be operating their franchise in five years. “This means that franchisors have a lot of work to do to either keep those franchisees in the system or replace them with new operators,” he said.

The 2010 National Franchisee Satisfaction Survey can be accessed for free at www.FranchiseFactsUSA.com/reports.php. The survey will be compiled each year from January through October, and then analyzed and released in the following January. Franchise Facts also conducts private, targeted surveys for franchise clients.

Clarification of Red Flags Rule Assists Franchisors

On Dec. 18, 2010, the Red Flags Program Clarification Act of 2010 was signed by President Obama and went into effect on Dec. 31, 2010. The Clarification Act clarifies the application of the Red Flags Rule by the Federal Trade Commission (“FTC”) by defining more specifically which types of financial transactions will define a business as a “creditor” under the law.

The Red Flags Rule requires businesses and other entities to develop and implement identity theft prevention programs. It was published in November 2007 and went into effect on Aug. 1, 2009, nearly a year later than initially planned because businesses struggled to comply. Further issues arose during the first year of compliance, which the new Act seeks to address.

“The effect of this clarifying act is that professionals and businesses that provide products and services in advance and require payment at a later time are not required to comply with the Red Flags Rule. Franchisors that provide services to franchisees and then bill later for these services would also not fall under the definition of a 'creditor' solely because of that practice,” said Meredith Bauer, attorney with Larkin Hoffman Daly & Lindgren Ltd. in Minneapolis.

Previously, the Red Flags Rule had been interpreted so that providing a service in advance of payment would make any business a creditor. But it was pointed out that almost any business transaction ' from a franchisor providing services in advance of a royalty payment to an attorney billing on a 30-day cycle ' would be defined as a creditor.

However, other activities by franchisors might still leave them subject to the Red Flags Rule ' for example, if they provide or arrange for financing for the initial franchise fee or required site upgrades. Bauer said that franchisors that work with small franchisees who sign franchise agreements as individuals and link their personal bank accounts to the franchisor, perhaps for the purpose of regular disbursement of royalties, would likely be covered by the Red Flags Rule. “In addition, language in the new law retains the right of the FTC to find application of the law to a creditor if it determines there is a 'reasonably foreseeable risk' of identity theft,” she said.

The FTC's Red Flags Rule Web site is www.ftc.gov/bcp/edu/microsites/redflagsrule/index.shtml, and the new law is a highlighted link.

Virginia AG Clarifies Definition of Franchising Relationship

In January, Virginia Attorney General Ken Cuccinelli clarified that a “typical” franchise relationship would not subject the franchisor to the provisions of a state law that was proposed in 2010 that would have raised penalties on employers who misclassify employees as contractors. Cuccinelli's opinion letter was a response to an official request for an advisory opinion by Del. James LeMunyon regarding whether franchisees would be considered “employees” or “independent contractors” under the Worker Misclassification Act (Senate Bill 34). The bill did not pass in the 2010 legislative session.

States have been cracking down on misclassification of workers by employers seeking to avoid requirements for unemployment insurance, workers' compensation, and other requirements. Senate Bill 34 was Virginia's latest example.

Cuccinelli wrote that franchising is a “distinct form of business enterprise” in which a franchisee is not an employee of the franchisor. “The franchisee is not performing services 'for an employer,'” Cuccinelli wrote. “Rather, the franchisee, upon reaching agreement with the franchisor, is performing services for the profit and account of the franchisee. In addition, unlike the ordinary contract of employment, the franchisee is not being remunerated by the franchisor. Instead, it is the franchisee who pays the franchisor for the privilege of using a trademark and business system. I also note that the typical franchisee is not an 'individual' but a corporation. Consequently, application of this test to typical franchise agreements would result in the exclusion of franchisees and franchisors from the scope of this statute.”

The opinion can be found at www.vaag.com/OPINIONS/2011opns/10-111-LeMunyon.pdf.

NJ Proposes to Expand Layoff Warnings to Multi-Unit Operators

The New Jersey legislature is considering a bill that would extend the state's laws requiring employers to notify employees prior to a layoff to multi-unit franchise systems. As Assembly Bill 3583, the bill passed a vote in the Labor Committee on Jan. 25 and was moved as the identical Senate Bill 2679 to the Senate Labor Committee.

Mark Diana, attorney with employment and labor law firm Ogletree Deakins (Morristown, NJ), said that the law would have a significant effect on multi-unit franchisors and franchisees in New Jersey. “Specifically, the new definition of 'employer' would include 'a holding company or franchisor which operates one or more franchise locations, and all of the franchise location owners or franchisees of the franchisor,'” he wrote in a short analysis of the bill. “Second, the bill would expand the definition of an 'establishment' to include 'one or more franchise locations of a franchisor.' Third, the bill defines 'franchise location' as 'an establishment operated by a franchisee of a common franchisor, which establishment may share a common name or business model with one or more other franchise locations of a common franchisor.'”

With those expanded definitions, franchisors and multi-unit franchisees would have to count proposed terminations and layoffs that would occur within a 30-day period at all potentially affected units in New Jersey as a single unit, and then determine if that reached the threshold for the state's definition of a “mass layoff,” thus triggering notification requirements.

The bill can be found by searching at www.njleg.state.nj.us/bills/billsbynumber.asp.

Franchisee Satisfaction Survey Points to Disconnect

The first National Franchisee Satisfaction Survey, released by Franchise Facts in January, paints a bleak picture of franchisee profitability, satisfaction, and franchisor relations, and it concludes that franchisors have a long way to go to improve relations and support of their franchisees.

“Franchisees have had an exceptionally difficult year ' possibly the worst of their working lives. National Franchisee Satisfaction Survey respondents report that few are meeting their financial goals, seeing increased revenues/profits or would consider recommending their current franchise to a prospective franchisee. The vast majority [84%] do not expect to be with their current franchise in five years time,” the survey states.

The survey, which was three years in the making, attempts to deepen the understanding of franchising from a franchisee's perspective, said Perry Shoom, president of Franchise Facts (www.franchisefactsusa.com). With better information, he believes that franchisors and franchisees can improve relations, operations, and brand success. “What has passed for research in the last few years ' in franchising and in other industries ' has usually been done by companies to support their marketing claims,” he said. “We are taking research back to its roots. This is research that a company can act on.”

A sampling of specific findings underlines the depth and breadth of franchisees' concerns:

• 15% of franchisees feel that their franchisors provide good support (pre-opening, opening, and ongoing);
• 18% of franchisees feel that their franchisor is concerned with local store profitability;
• 14% of respondents feel they have a good relationship with their franchisor; and
• 16% of respondents would recommend their current franchise to a prospective franchisee.

Franchisees declared similarly low levels of satisfaction with ongoing training and marketing, the caliber of vendor programs they are offered, and even their franchisor's understanding that “I must be successful for them to be successful.”

However, Shoom points out that franchisors should not necessarily expect very high satisfaction ratings across large populations of franchisees. “I don't think it's realistic that any franchise would see 80% franchisee happiness or that 90% of franchisees are satisfied with their financial success,” he said. “In dealing with businesses that are diverse, if you could hit 50% satisfaction, that would be good.”

Perhaps the biggest takeaway for franchisors, according to Shoom, is the high percentage of franchisees who say that they do not expect to be operating their franchise in five years. “This means that franchisors have a lot of work to do to either keep those franchisees in the system or replace them with new operators,” he said.

The 2010 National Franchisee Satisfaction Survey can be accessed for free at www.FranchiseFactsUSA.com/reports.php. The survey will be compiled each year from January through October, and then analyzed and released in the following January. Franchise Facts also conducts private, targeted surveys for franchise clients.

Clarification of Red Flags Rule Assists Franchisors

On Dec. 18, 2010, the Red Flags Program Clarification Act of 2010 was signed by President Obama and went into effect on Dec. 31, 2010. The Clarification Act clarifies the application of the Red Flags Rule by the Federal Trade Commission (“FTC”) by defining more specifically which types of financial transactions will define a business as a “creditor” under the law.

The Red Flags Rule requires businesses and other entities to develop and implement identity theft prevention programs. It was published in November 2007 and went into effect on Aug. 1, 2009, nearly a year later than initially planned because businesses struggled to comply. Further issues arose during the first year of compliance, which the new Act seeks to address.

“The effect of this clarifying act is that professionals and businesses that provide products and services in advance and require payment at a later time are not required to comply with the Red Flags Rule. Franchisors that provide services to franchisees and then bill later for these services would also not fall under the definition of a 'creditor' solely because of that practice,” said Meredith Bauer, attorney with Larkin Hoffman Daly & Lindgren Ltd. in Minneapolis.

Previously, the Red Flags Rule had been interpreted so that providing a service in advance of payment would make any business a creditor. But it was pointed out that almost any business transaction ' from a franchisor providing services in advance of a royalty payment to an attorney billing on a 30-day cycle ' would be defined as a creditor.

However, other activities by franchisors might still leave them subject to the Red Flags Rule ' for example, if they provide or arrange for financing for the initial franchise fee or required site upgrades. Bauer said that franchisors that work with small franchisees who sign franchise agreements as individuals and link their personal bank accounts to the franchisor, perhaps for the purpose of regular disbursement of royalties, would likely be covered by the Red Flags Rule. “In addition, language in the new law retains the right of the FTC to find application of the law to a creditor if it determines there is a 'reasonably foreseeable risk' of identity theft,” she said.

The FTC's Red Flags Rule Web site is www.ftc.gov/bcp/edu/microsites/redflagsrule/index.shtml, and the new law is a highlighted link.

Virginia AG Clarifies Definition of Franchising Relationship

In January, Virginia Attorney General Ken Cuccinelli clarified that a “typical” franchise relationship would not subject the franchisor to the provisions of a state law that was proposed in 2010 that would have raised penalties on employers who misclassify employees as contractors. Cuccinelli's opinion letter was a response to an official request for an advisory opinion by Del. James LeMunyon regarding whether franchisees would be considered “employees” or “independent contractors” under the Worker Misclassification Act (Senate Bill 34). The bill did not pass in the 2010 legislative session.

States have been cracking down on misclassification of workers by employers seeking to avoid requirements for unemployment insurance, workers' compensation, and other requirements. Senate Bill 34 was Virginia's latest example.

Cuccinelli wrote that franchising is a “distinct form of business enterprise” in which a franchisee is not an employee of the franchisor. “The franchisee is not performing services 'for an employer,'” Cuccinelli wrote. “Rather, the franchisee, upon reaching agreement with the franchisor, is performing services for the profit and account of the franchisee. In addition, unlike the ordinary contract of employment, the franchisee is not being remunerated by the franchisor. Instead, it is the franchisee who pays the franchisor for the privilege of using a trademark and business system. I also note that the typical franchisee is not an 'individual' but a corporation. Consequently, application of this test to typical franchise agreements would result in the exclusion of franchisees and franchisors from the scope of this statute.”

The opinion can be found at www.vaag.com/OPINIONS/2011opns/10-111-LeMunyon.pdf.

NJ Proposes to Expand Layoff Warnings to Multi-Unit Operators

The New Jersey legislature is considering a bill that would extend the state's laws requiring employers to notify employees prior to a layoff to multi-unit franchise systems. As Assembly Bill 3583, the bill passed a vote in the Labor Committee on Jan. 25 and was moved as the identical Senate Bill 2679 to the Senate Labor Committee.

Mark Diana, attorney with employment and labor law firm Ogletree Deakins (Morristown, NJ), said that the law would have a significant effect on multi-unit franchisors and franchisees in New Jersey. “Specifically, the new definition of 'employer' would include 'a holding company or franchisor which operates one or more franchise locations, and all of the franchise location owners or franchisees of the franchisor,'” he wrote in a short analysis of the bill. “Second, the bill would expand the definition of an 'establishment' to include 'one or more franchise locations of a franchisor.' Third, the bill defines 'franchise location' as 'an establishment operated by a franchisee of a common franchisor, which establishment may share a common name or business model with one or more other franchise locations of a common franchisor.'”

With those expanded definitions, franchisors and multi-unit franchisees would have to count proposed terminations and layoffs that would occur within a 30-day period at all potentially affected units in New Jersey as a single unit, and then determine if that reached the threshold for the state's definition of a “mass layoff,” thus triggering notification requirements.

The bill can be found by searching at www.njleg.state.nj.us/bills/billsbynumber.asp.