Actions May Speak Louder than Words: Can Franchise Agreements Protect Franchisors from Liability as Joint Employers?

by Nexsen Pruet, PLLC
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Franchise Post - August 5, 2014

The National Labor Relations Board (NLRB) has created a buzz within the franchise community by announcing that McDonald's may be responsible as a "joint employer" for alleged unfair labor practices of some of its franchisees.  Employees of franchisees have filed more than 180 unfair labor practice charges against both the franchisees and McDonald’s. The NLRB's general counsel has said that 43 of these cases have merit. He has authorized the filing of complaints naming McDonald’s as a respondent in those cases unless settlements are reached. 

The McDonald’s franchise agreement, as is typical with most franchise agreements, contains language stating that franchisees are independent contractors and not agents or employees of the franchisor. Specifically, section 16 of the franchise agreement states:

Franchisee is, and shall remain, an independent contractor responsible for all obligations and liabilities of, and for all loss or damage to, the Restaurant and its business… Further, Franchisee and McDonald’s are not and do not intend to be partners, associates, or joint employers in any way and McDonald’s shall not be construed to be jointly liable for any acts or omissions of Franchisee under any circumstances.

In most cases brought against franchisors by third parties, the franchisor’s first – and historically best – line of defense has been to claim that the language in its franchise agreement is dispositive of this issue.

Over time, however, courts and other decision makers have considered the language as evidence of this relationship but not the final word.  More recently, in determining whether a franchisor can be responsible for the acts of its franchisees, courts and agencies such as the NLRB have delved into the nature of the franchise relationship. In addition to the language in the franchise agreement, these decision makers have considered provisions in the franchisor’s operations manual as well as company policies, directives, and training, all with an eye toward examining the amount of control a franchisor exercises over its franchisees. 

The more control points the franchisor has in the franchise relationship, the more likely it is that the franchisor will be held responsible for the franchisees’ acts. Typical control points are whether the franchisor:

  • Retains the power to hire and fire franchisee employees;
  • Supervises the control of employee work schedules or conditions of employment;
  • Determines the rate and method of payment; and
  • Maintains employment records.

To establish joint employment status, it is not necessary for all of these elements to be present. The underlying test is who controls employees’ day-to-day activities.   

In the McDonald’s cases, the NLRB general counsel may have concluded that requiring franchisees to adhere to certain rules regarding their relationships with employees, such as how to staff restaurants and what staffing software to use, indicated overall control of franchisee employment practices.  Or the decision may be motivated by politics.  Many in the restaurant industry speculate that the NLRB is trying to make it easier for unions to organize restaurant employees across franchise systems and get wages raised to at least $15.00 per hour nationwide through collective bargaining with franchisors.

If courts accept the NLRB general counsel’s view of joint employment, there will be an immediate chilling effect on the fast food industry and the franchise model.  At a minimum, the decision confirms the need for franchisors to examine their relationship with their franchisees. 

The NLRB's analysis is not revolutionary, but evolutionary.  In past decades, courts have looked beyond the language in the franchise agreement to determine the franchisor's role in a franchisee’s business.  If, for example, the franchisor controls how a franchisee manages the security of its business premises and a third party is injured there, a court is likely to consider more than the language of the franchise contract in determining the franchisor's potential liability. Likewise, if a franchisor seeks to control many aspects of the franchisee’s employment relationships, then it should not be surprised when a third party claims that the franchisor has potential liability as a joint employer. The question is how much control is necessary for the franchisor to be found a joint employer with its franchisees. 

Historically, franchisees expect the franchisor to provide all of the necessary tools to operate a successful business under the franchisor’s specially formulated system.  They expect a turnkey model.  In most cases, franchisors are eager to accommodate this expectation. They are also motivated by the need to maintain the uniformity necessary to benefit customers and franchisees and to protect the integrity of the trademarks that are the backbone of the franchise system. 

The NLRB general counsel’s position may discourage franchisors from mandating such standards. Under broader control tests, franchisors must balance the benefits of such mandates against their potential unintended consequences. It may now be more propitious for the franchisor to encourage compliance with system standards through the language of “should” rather than “must.”  By issuing recommendations instead of edicts, a franchisor may weaken the argument that it is controlling the business of its franchisees.

The specter of joint employment liability may cause seismic shifts in the franchise model.  The NLRB's pronouncement is a wakeup call to franchisors to examine their franchise relationship and, perhaps in some cases, to modify their conduct to avoid potential liability.  In some instances, the franchise relationship may need to be tempered to guide franchisees through recommendations rather than edicts.  Likewise, members of the franchise community must continue to educate legislators and regulators on the unique characteristics that differentiate the franchise model from other business models.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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