Six Ways Franchisors Can Reduce Joint Employer Liability Risk
CalBar Certified Franchise & Distribution Law Specialist
by Barry Kurtz
818-907-3006
In January 2016, the National Labor Relations Board (NLRB) determined that indirect control or the reserved right to control, even if unexercised, could be sufficient grounds to find a joint employer relationship between a franchisor and a franchisee. As a result, employees of McDonald’s, Dominos and many other systems initiated class action and individual lawsuits, naming the franchisor as a “joint employer” in wage and hour and other complaints.
Last June the Department of Labor withdrew the NLRB guidance.
Though good news, it doesn’t necessarily change the law – the action simply reflects the current administration’s friendlier attitudes towards business. But franchisors are still at risk. The multitude of civil and administrative actions pending against franchisors in various courts on the joint employer issue are not affected by the Department’s action.
Because joint employer liability is still a risk for franchisors, consider taking these precautions:
1. Names: Prohibit franchisees from using your brand name when establishing their franchisee-entities; and consider enforcing the rule for existing franchisees as well as new owners. Virtually all Franchise Agreements forbid unit owners from doing so, but these provisions are not uniformly enforced.
2. Employment Materials: Require franchisees to prominently include their own entity name (rather than the system’s brand or logo) on employment applications, vendor and utility applications, checks, stationary, business licenses, employee manuals and the like.
3. Ownership: Require franchisees to post placards stating units are independently owned and operated under a license from you. If practical, consider providing your franchisees with such placards to maintain uniformity of message within your system.
4. Acknowledgements: Require franchisees to obtain written acknowledgments from all existing and new employees that that state the employee is employed by the franchisee and only the franchisee, and that the franchisor has no direct or indirect control over hiring, firing, compensation, discipline, supervision or scheduling policies. Again, consider providing franchisees with a standard-form acknowledgment to maintain uniformity if practical.
5. Reviews: Examine the various controls you have over operations in your franchise agreements, operating manuals and by custom and practice. Would you issue a default notice if a currently required action was not performed? If not, consider eliminating or modifying requirements that are not essential to the protection of your brand and brand standards.
6. Training: Educate field personnel. Teach them to avoid involvement in franchisees’ employment matters and the direct training of franchisees’ employees. Field personnel should be advised to direct franchisees to third-party human resource service providers of the franchisees’ choice for assistance and to offer training and support to franchisees and management personnel but not directly to staff employees.
Please let us know if you have any questions regarding these matters.
Barry Kurtz is the Chair of our Franchise & Distribution Practice Group.