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Canary in the coal mine—why small, telltale events matter to franchisors


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Philip Zeidman

Because early coal mines had only primitive provisions for ventilation, miners would bring a caged canary into new coal seams.  As long as the canary was singing, all was well—or as well as the life of a coal miner could be. But because canaries can detect even small concentrations of gas and react instinctively, a silent canary was the signal for immediate evacuation.

The phrase has now come, more broadly, to mean an occurrence which is a harbinger of more consequential events which are likely to follow, or evidence of an underlying condition—either encouraging (market receptivity to a new product suggesting underlying demand for an entire new category) or threatening (a melting glacier as a sign of global warming).

More sensitive antennae

Something like that is manifesting itself in the world of international franchise regulation. In most cases, of course, we need not resort to hunting for small and apparently unrelated occurrences; franchise legislation, regulation and litigation is front and center for those of us who spend our lives studying the activities that take place on that stage.  

The advent of the internet has brought with it reports—in different languages, from a dizzying array of countries—of new proposed laws, new regulations or agency decisions, and the like, much more rapidly than in earlier times. But not always.

Increasingly, being aware of the likelihood of such developments, and then to prepare for them, requires much more sensitive antennae, and the cultivation of the capacity to detect the possibility of larger movements from small but telltale happenings.

Sometimes the silent canary seems at first to have little to do with franchising. Frequently, the focus of the activity in question is on a particular field of endeavor. When in 2013 Australia launched a three-year campaign regarding employment practices in the hospitality industry over concerns that exploitation was deep-seated in an off-the-books economy of cash-in-hand jobs, the ramifications were not immediately apparent.  But that campaign has now reached its third and final wave, an audit of the fast-food sector.  

A nationwide investigation revealed that almost half of fast-food stores underpaid their employees, with similarly high levels of that and other forms of industrial noncompliance in hotels and restaurants. Since those sectors are heavily franchised, the vow to crack down on wage fraud across the entire franchise industry should not have come as a surprise.  

The natural concomitant may well be to target franchisors which fail to deal with exploitation by their franchisees. And we know too well how that may trigger the dreaded “joint employer” characterization.

In Korea, widespread complaints that franchisees are withholding a significant portion of the wages of part-time workers have been leveled against both indigenous franchisors and the Korean operators of U.S. franchised brands in the foodservice, discount retail and convenience store fields.  

Despite the disclaimers by the franchisors that the law does not permit them to meddle in the franchisees’ management, demands for further action against the franchisors continue, featuring boycotts, TV documentaries and even calls for the arrest of a CEO. Once the lid is lifted off that cauldron, what else will be found, or imagined?  

In January, Pizza Hut Korea was fined for compelling store owners to pay what were termed unlawful franchise fees, alleging that some were in the form of assessments imposed unilaterally, some from payments which should have been deposited instead of received directly.

Franchises for ‘princelings’

Consider that against the background of a backlash against the award of attractive franchises to “princelings,” the children of wealthy master franchisees, and of complaints that units of foreign franchises are being placed so close to locally owned operations as to threaten their existence. That may not be gas you’re smelling, but it may be the fumes of an especially noxious stew.

What the canary is detecting may not always be negative for franchising. In January, Saudi Arabia’s Ministry of Commerce announced it would be seeking opinions from the public about a proposal for a “trade franchise system” under preparation by the ministry. While that could be problematic, it must be viewed in the context of the unprecedented reforms instituted last year in that kingdom to create an organized market expected to help foster small- and medium-sized businesses, including franchising companies.

In November of last year, the Indian government set out to dismantle its cost-centric black market. While certainly not initiated with franchising in mind, the industry could see a positive impact, including increased investments; women, retirees and young people being attracted into franchising; better franchise financing; and better conditions for franchisees to compete against independents which have eluded paying taxes.  

Also in November, as part of the 2016–2020 Franchise Malaysia Goes Global plan, to promote the growth of local foodservices through the region and beyond, the Malaysian government committed funds to franchise development.

Most of these events could not be heard over the cacophony of reports of franchise laws and regulations and court decisions.  We need to train our ears to listen for the canary singing—or falling silent.

Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office and can be reached at philip.zeidman@dlapiper.com or 202-799-4272.

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