By Christopher A. Gray, Esq.
The franchise model is built upon the idea that a franchisee pays for the right to use a franchisor’s brand, marketing and goodwill in launching and operating the franchisee’s business. The franchisee is generally responsible for its own business operations, including employment and legal issues. Recent decisions from the National Labor Review Board (“NLRB”) and the U.S. Department of Labor suggest it’s not that simple.
In the past, a franchisee’s employees were the sole responsibility of the franchisee. If an employee was mistreated, the employee’s sole recourse was to hold the franchisee liable. This model has been replaced instead with an analysis of whether the franchisee and franchisor both exercise control over the employee. If both franchisor and franchisee are determined to have some amount of control over an employee, they are joint employers and both are responsible for acts of the other. In determining whether the franchisor has such control, factors to examine include whether the franchisor (directly or indirectly) has the power to hire or fire employees, change employment conditions, or determine the rate and method of pay.
Most commentary on this change focuses on the potential damages to large franchisors. For example, imagine a scenario in which a fast-food franchisee of a large national brand illegally withholds overtime pay from its employees in violation of federal law. Prior to the recent NLRB and Department of Labor decisions, only that franchisee would be liable for the unpaid overtime. Now the national brand franchisor could be liable as well. While this scenario would seem to be of little concern to the franchisee, franchisees should evaluate how their actions could cause rifts with their franchisors, and what the impact of that may be under their franchise agreements.
It is reasonable to expect that franchisors will require greater documentation from franchisees regarding employee-treatment issues, such as the payment of wages, provision of healthcare, and general working conditions. Franchisors likely may conduct more frequent operations audits in order for franchisees to maintain their franchise licenses. In addition, franchisees who use temporary employees may incur similar liability. For example, a franchisee who uses temporary employees from an agency that mistreats its workers might find itself liable for that mistreatment.
For these reasons, franchisees should give extra scrutiny to the agreements they have with their franchisors and employment agencies. The agreements should carefully delineate the rights and responsibilities of the parties, and also establish what steps, if any, the franchisee needs to take to ensure it is protected from the liability of others.