A common question that we receive from our franchisor clients is, “Can we update our FDD and franchise agreement permitting the franchisor to impose fines on franchisees for non-compliance?” The simple answer is that while you can update your documents to permit the imposition of fines, the real question franchisors should be asking is, “Are fines an effective tool to minimize instances of non-compliance with System standards?”
Recently, a hotel received unwanted attention for its policy of imposing wedding couples a $500 fine for every negative Yelp or other social media site review posted online by their guests.
As part of the policy posted on the hotel’s website, the rationale behind the fine was explained as follows:
Please know that despite the fact that wedding couples love Hudson and our inn, your friends and families may not,”… “If you have booked the inn for a wedding or other type of event . . . and given us a deposit of any kind . . . there will be a $500 fine that will be deducted from your deposit for every negative review . . . placed on any internet site by anyone in your party.
In response to the attention that this policy has generated, the hotel owners have responded that the policy was posted on its website as a joke, was never enforced and the policy has subsequently been removed from the hotel’s website. The reason this story has gone viral is the irony that a business could think that imposing fines is an effective way to limit negative reviews, rather than working to fix the service and operational issues that may prompt such negative reviews.
This story serves as an over exaggerated example of the ineffectiveness of using fines rather than resolving the underlying issue that is resulting in the behavior the fines are seeking to curtail. In the case of franchise systems, if a franchisor is considering implementing fines, it is usually because they are trying to stop a wide spread issue, and is not in response to some isolated instances involving “rogue” franchisees. This suggests that the franchisor should be focused on why the instances of non-compliance are increasing, rather than hoping that it can ignore the underlying problem and simply levy fines. While imposing a fine may result in short term results for increasing System compliance, it is difficult to imagine that it will achieve long term or permanent results if the underlying issues are not addressed.
Franchisors should also remember that when addressing non-compliance, there is not a “one size fits all” solution. If a franchisee is not following System standards because they are undercapitalized or struggling financially, it seems that imposing a fine would just be piling on to their problem. In that instance, the franchisee would view the franchisor as having no empathy and the relationship would further deteriorate. Similarly, if a franchisee is not following System standards because their business is struggling and they have become despondent and no longer keeping a close eye on their operations, imposing a fine may just lead to a franchisee’s sense of despair and increase their non-compliance.
While the use of fines may be effective in certain instances, it is difficult to see how a wholesale and indiscriminate use of fines would serve as a “silver bullet” to increase overall System compliance with brand standards. It is also difficult to see how fines could be effective in the long run, if the franchisor is not also focused on addressing the underlying behavior and issues that are resulting in the non-compliance.