Franchisor Liability As a Joint-Employer

Franchisors have a valid interest in protecting the brand they have worked hard to create. they accomplish this by requiring uniformity from their franchisees and exercising control over certain aspects of their franchisees’ operations. This includes control over the location and look of their franchisees’ places of business, the products and services offered by their franchisees and how intellectual property is utilized and protected by their franchisees. Franchisors also exercise control over their franchisees’ “employees by dictating minimum employment standards, the type of training that is required for employees and the clothing or uniforms employees must wear. Unfortunately, this control over their franchisees’ employees can sometimes create liability for franchisors when employees sue the franchisees for violations of Title VII, the Fair Labor Standards Act or other labor laws. It is becoming increasingly common that employees are also suing the franchisor claiming the franchisor is liable because they acted as a joint-employer based upon the amount of control they exercised over their franchisees’ employees. This joint-employer claim creates a second, deep pocket for them to pursue.

Background of Joint-Employer Liability

The current standard for determining whether an individual or entity is a joint-employer was set forth in the National Labor Relations Board (the “NLRB”)’s 2015 decision in the Browning-Ferris Industries matter. Specifically, the NLRB held the primary inquiry for determining joint-employer status is whether the purported joint-employer possesses the actual or potential authority to exercise control over the primary employer’s employees, regardless of whether the control is in fact ever exercised.

In December 2017, the NLRB established a more employer-friendly standard in the Hy-Brand Industrial Contractors, Ltd. matter that required the purported joint-employer to actually exercise joint control over essential employment terms, rather than just reserving the right to exercise such control. This control had to be “direct and immediate” and more than just control that is “limited to routine.”

On February 26, 2018 the NLRB then reversed and vacated their Hy-Brand decision because of a potential conflict of interest, thereby reinstating the standard set forth in the Browning-Ferris matter. While this standard remains in effect, it is expected that once the Senate acts on either President Trump’s nomination to fill an empty seat on the NLRB or passes the Save Local Business Act (which has already been passed by the House of Representatives), the more employer-friendly standard previously articulated in the Hy-Brand decision will be reinstated.

Minimizing the Risk of Liability

Based on the standards described above, courts will continue to focus on the amount of control franchisors exercise over their franchisees’ employees, and the rights franchisors have to control these employees as set forth in the applicable franchise agreements. Typically, courts have determined the fact franchisors require employees to wear uniforms or logos, or that they attend managerial training is not sufficient to create joint-employer status. Additionally, courts have determined that even though franchisors perform ministerial payroll functions or recommend personnel policies to their franchisees, that such behavior is not sufficient to justify a joint-employer determination.

To reduce the potential exposure as much as possible, franchisors should make it clear in their franchise agreement that they are not an employer and do not have the authority to hire, fire, promote or discipline their franchisees’ employees. Franchisors should also require their franchisees to disclose in their job application forms that the franchisor is not an employer. Franchisors should avoid managing the employees of their franchisees as much as possible. Franchisees should be required to perform all human resource tasks and make all staffing decisions. Franchisors should train their franchisees and managers and allow them in turn to train and oversee, evaluate and discipline their employees.

Recommendations

It is strongly recommended that franchisors should have their franchise disclosure documents, operations manual and required employment-related forms reviewed and evaluated for potential liability arising from joint-employer claims. The experienced attorneys at LegalStandard.com can perform these reviews for as little as $495.00 depending upon the extent of the documents reviewed. There is no doubt that the review of these documents will cost much less than the legal fees incurred in defending a joint-employer claim by one of your franchisees’ employees.