The traditional franchise model is being reshaped by changes in the market and in regulations. Boards need to stay current with how the traditional model is evolving and the new challenges it’s creating. One question that’s being tested is how much responsibility lies with the franchisor and how much lies with the franchisee. As legal situations arise, franchisees are questioning whether they should have to shoulder the entire responsibility when franchisors place limits on certain issues that could cause them liability. For now, the courts are increasingly being asked to decide these questions. Where possible, boards may need to be involved in helping franchisors and franchisees strike a better balance of responsibility.

How the Franchise Model Works

The franchisor owns the brand, technology and processes. Many franchises are eating or drinking establishments. In those cases, the franchisor also owns the recipes. In exchange for a fee, the franchisor sets the standards of operation and provides support services.

In this type of arrangement, the franchisee also has designated responsibilities. The franchisee owns and manages the assets, hires and trains workers, and oversees the entire operation. For their efforts, franchisees get a return on their investment as an entrepreneur.

New Challenges for the Franchise Business Model

While franchise opportunities sound like a well-oiled machine, they present different challenges for franchisors and franchisees.

Today’s franchisors have to be concerned with brand innovation. To be successful in the franchise world, franchisors need to strive to keep their brands exciting, innovative and refreshed. Consumers expect a satisfying experience from the products and services, as well as from the staff. They also expect professional support from the franchisee.

One of the challenges for franchisees is to work toward developing a consistent experience across multiple franchise locations, despite having different locations, franchisees and staff.

How to allocate spending on advertising can be a point of contention for franchisors and franchisees. Many franchises rely on advertising to bring in enough business. Franchisors and franchisees need to find the right balance between regional and national priorities in the advertising budget.

Franchisors and franchisees need to be concerned with their consumers’ right to privacy and the data privacy laws. Business processes are becoming increasingly digitized. As a result, franchisors need to incorporate responsibilities for third parties around capturing, protecting and disclosing data.

As overseers, boards must ensure that contracts don’t become outdated. Franchise agreements that were entered into several years ago may already be outdated. Contracts that have outdated cyber, legal and regulatory language may be difficult to enforce. In their role as overseers, boards need to ensure that companies are using updated accounting processes.

As franchisees and employees challenge issues in a legal sense, court rulings may challenge the traditional franchise model and franchisors may be required to accept more liability than they’ve had in the past.

McDonald’s Lawsuits Challenge the Traditional Franchise Model

There have been various lawsuits stemming from issues related to customer attacks on employees and harassment of workers at McDonald’s restaurants. More than 90% of McDonald’s restaurants are owned by franchisees.

In one lawsuit, 17 McDonald’s cooks and cashiers in Chicago are suing the chain over what they claim is a nationwide pattern of customers attacking and harassing workers. The suit claims that McDonald’s and its franchisees have failed to protect workers by requiring them to work extended hours, often late into the night. Workers also allege that the stores are designed in ways that leave them vulnerable to attack and that the company failed to provide them with adequate security training. Workers allege that they and their coworkers face the risk of violence in their workplaces every day.

In their response, McDonald’s stated that it, “takes seriously its responsibility to provide and foster a safe working environment for our employees, and along with our franchisees, continue to make investments in training programs that uphold safe environments for customers and crew members. In addition to training, McDonald’s maintains stringent policies against violence in our restaurants.”

After female workers came forth with a lawsuit over sexual harassment of female workers, McDonald’s announced a new training program that covers anti-harassment and creating a safe working place. McDonald’s said that it had launched the program to all corporate-owned stores and that they were making progress in getting stores to implement it. Labor groups have stood behind employees. Both groups want to hold McDonald’s accountable for incidents at franchises.

In past lawsuits, McDonald’s has argued that it shouldn’t be held accountable for franchisees and their employees. Recently, a federal appeals court in California gave the ruling that McDonald’s didn’t have sufficient control over franchisees’ employees to be deemed a joint employer with equal liability.

The Chicago lawsuit states that the alleged attacks and harassment issues that workers described were due to choices that McDonald’s made at the franchisor level. Workers point to the design and location of the restaurants as posing an increased risk of harm. McDonald’s corporate headquarters choose the locations for their stores and they usually own or lease the property. Workers cited that lowered and split checkout counters make it possible for customers to jump over counters or enter the kitchen on foot. Workers tell stories of being punched, threatened and having objects thrown at them. The lawsuit wording details several instances in which a customer stood on top of the counter and waved a gun around.

The lawsuit also tells of three female workers who said that men had exposed themselves and verbally assaulted them as they were cleaning the bathrooms. Workers were not able to lock the bathroom doors and the bathrooms weren’t visible to their team members. McDonald’s employees also complained about the design of the drive-through window, which afforded customers the opportunity to grab workers or climb through the window to attack them.

To make matters worse, several workers alleged that their managers had refused to call the police and discouraged them from doing so themselves. Some managers laughed in response to threats and harassment.

Modern Governance Tools Enhance Entity Governance Management

Diligent Entities helps franchises to centralize and manage their corporate records to improve entity governance and better ensure compliance, mitigate risk and improve decision-making through an integrated governance solution. Entities can use the highly secure platform to create a single source of truth. The tool makes it possible to manage the ongoing accuracy of corporate records using compliance calendars, reminders and workflows. Boards can easily report on governance and compliance requirements and electronically file statutory forms with global regulatory bodies.

Diligent Entities plugs seamlessly into the rest of the Diligent ecosystem and it provides an integrated entity governance solution to fuel good governance practices across multiple business units.