Franchisor Best Practices for COVID-19

Faegre Drinker Biddle & Reath LLP

With COVID-19 changing everything we do in our personal and business lives, franchisors are faced with all the same challenges as other businesses, but also several unique twists due to the nature of franchising. Franchising as we know it has changed. Business as we know it has changed. Life as we know it has changed. In some ways those changes will be short term. In other ways, those changes will be more long term. Importantly, we will get through it. Yes, we will get through it. TOGETHER. Now more than ever, LEADERSHIP MATTERS.

Above all else, on behalf of everyone at Faegre Drinker, our thoughts are with all of you, especially those who have been impacted by the coronavirus, and with the health care professionals helping to manage this global health challenge. The health and well-being of everyone in our families, businesses and communities are paramount.

Our Faegre Drinker Coronavirus Task Force has established a resource center, to which we are posting regular alerts to keep employers/business owners informed of issues ranging from employers’ issues, legislative/regulatory updates (including government-ordered closures and federal emergency relief measures), business contract rights and obligations, eminent domain and other substantive topics.

This article identifies specific challenges franchisors face and outlines best practices for franchisors to consider. We are working with franchisor clients by the hour to help them address these challenges and to effectively communicate with franchisees regarding the challenges they face. We will update this article as the situation continues to evolve.

We are also hosting a series of audiocasts specifically for franchisors, with the first audiocast scheduled for Thursday, March 19 at 3 p.m. CT/4 p.m. ET. The agenda for each audiocast will include a time for questions and answers. Please utilize the “Submit Your Questions” link below to send us your questions. We also will endeavor to share how franchisors are generally addressing these issues. Our team is committed to keeping franchisor clients informed on the key issues they face.

If you plan to join the audiocast, please call in using the Dial-In Number and Participant Code below:

  • Dial-in: 800-368-1029
  • Participant Code: 597009
  • Alternate Line: +1 334-777-6981

If you would like to submit questions to the speakers prior to the start of the audiocast, please click the link below and fill out the form.

Below is a general summary of key leadership and communication principles and best practices as well as a summary of key legal issues that franchisors face with COVID-19 and the corresponding business realities.

Leadership Matters

  • Franchisor leadership is more critical than ever for all franchise system stakeholders. You all know how important it is to exhibit empathy, transparency, a clear vision, an “in it together” attitude and constant communication/updates. What you do not need to have is all the answers. In fact, there is no way you can, as a decision you make today may be changed by a new reality tomorrow. Continue to acknowledge the very real financial and personal hardship franchisees may face. Now is the time to be clear that you are ready to lead in these unprecedented times. Leadership will make a difference.
  • If you haven’t already, share with your franchisees a COVID-19 response plan, including resources and information for franchisees to use as they address COVID-19 issues with their employees, brand customers, lenders, suppliers and any other stakeholders. The COVID-19 response plan needs to appropriately distinguish between corporate and franchised locations, and it needs to include: an escalation of response, direction that franchisees must notify franchisors of incidents, and an organized communication strategy to address different situations. The response plan also should address franchisee questions regarding employment issues while striking the right balance as the franchisees’ employees are not the franchisor’s employees. Don’t forget that you still must consider vicarious liability and joint employer concerns under the circumstances.

The Role of the Franchisor

  • Franchisors have latitude under the Lanham Act to act swiftly and decisively to protect their brands, goodwill and trademarks. The Lanham Act requires franchisors to guarantee the quality of the services and products sold under their trademarks, which may require extraordinary measures during the coming weeks.
  • Franchisors also have a contractual basis in their franchise agreements to change brand standards in response to COVID-19. Identify and analyze clauses in your franchise agreements that permit the franchisor to change its brand standards. Then consider appropriate systemwide changes to brand standards to take into account the specific circumstances of your franchisees’ businesses and industry. Many industries like restaurants, and health, beauty and wellness concepts are impacted differently than other industries.
  • Franchisors should also have a contractual basis to address individual franchisees who do not take seriously COVID-19 and thereby threaten damage to the brand. Identify and analyze any franchise agreement clauses describing a franchisee’s obligation related to public health and safety, cleanliness, changes in brand standards, and compliance with all laws, regulations and ordinances. These provisions give franchisors leverage with any individual franchisees who may ignore the changes required of their franchised businesses and/or the demands from government officials.
  • When franchisors act to protect customer relationships during mandated closures and exercise their right to communicate with their customers, that does not show day-to-day control of franchisee operations. In that regard, the franchisor CEO’s communication to the brand’s customers can assure customers that the company and its franchisees understand the seriousness of the pandemic and will communicate steps that the brand will be taking in response to the pandemic. This role is crucial, as the franchisor should make sure that consistent communications are delivered to brand customers.
  • Manage media inquiries because consistent messaging to your brand customers is crucial. Either suggest that franchisees forward media inquiries to you for a response or provide franchisees with suggested messaging to respond themselves. For example, if a local media outlet seeks a comment about a franchisee’s closure, that franchisee should have received tools and information to help it properly direct the inquiry or respond in a manner consistent with the franchisor’s messaging.
  • Utilize your Franchise Advisory Council or franchisee task force to support franchisee input and buy-in to the different decisions you make as the franchisor.
  • Be a “go-to” source of information for franchisees, including identifying and sharing resources for franchisees like those referenced below. You also want to recognize the importance of being part of franchisee conversations, rather than sitting on the sidelines and letting franchisee fear and anxiety result in paralysis or actions that are inconsistent with the brand and what needs to be done now. It is important to have regular franchisee communications to address franchisee fears, anxieties and concerns.
  • Your communications to franchisees should include some type of disclaimer language to reinforce the franchisor/franchisee roles and responsibilities. Consider the following:

NOTE: Any best practices, guidance or related information we share with you and corresponding decisions we make are intended to help protect customer goodwill toward the _______ brand, as protecting the brand from potential reputational harm related to COVID-19 is paramount to your franchised businesses, as well as customers and all stakeholders in the __________ franchise system. While we do not control the details of work at any franchised business, we strongly urge you to carefully review and evaluate all information we share with you. Importantly, information we share with you is based on available information from various health agencies and other resources to-date; it is neither a comprehensive assessment of a franchisee’s employer-related obligations nor a substitute for legal advice on specific issues. Franchisees are solely responsible for compliance with all laws and regulations applicable to their franchised businesses. As to specific issues involving franchisee employees related to COVID-19, franchisees should consult with their lawyer for a full assessment of the facts and legal advice tailored to your situation. COVID-19 developments remain fluid and franchisees must make an effort to stay abreast of these developments. Unless we make brand-related decisions regarding certain system requirements, franchisees should make the decisions they deem best for their businesses and employees based on the unique facts and circumstances they may face, while understanding that an open line of communication and full alignment with _________ must be maintained from a brand protection standpoint.

  • Identify and analyze force majeure clauses in your contracts (supplier agreements, technology agreements, financing agreements) and your franchisee’s contracts (franchise agreements, subleases). Force majeure provisions in contracts can vary widely in terms of notice requirements, what constitutes a force majeure event and remaining performance obligations under the contract. The provision may or may not address the COVID-19 pandemic and/or government-mandated business closures. Not only are listed types of force majeure events important (disease, epidemic, act of God, government action), but also key is the language describing the nature and level of the required impact or interference — i.e., some clauses state that the event must prevent total or partial performance (impossibility), while others only require that the event significantly interfere with, hinder or otherwise make the invoking party’s performance substantially more onerous than originally anticipated by the parties. Even if the force majeure clause is triggered, it may have different ramifications. Some clauses only partially suspend performance obligations and/or specify how long performance is suspended. Statutes, such as the Uniform Commercial Code, may apply in some circumstances. Other legal doctrines like impossibility, impracticability or frustration of purpose also may impact contract performance issues.
  • Stay abreast of federal and state legislation as further noted below.
  • Be prepared to address franchisee fears regarding cash flow and remaining open for business or reopening for business if they are closed. They will be seeking royalty relief or other similar assistance. Each franchisor will need to run financial modeling to determine the impact of temporary royalty waivers or reductions. In some instances, fee deferral rather than waiver or reduction may be more appropriate, as royalty fees are the lifeblood of the franchisor’s ability to provide support. Temporary suspension of advertising fund contributions, technology fees or other similar fees may also be an option. Depending on the extent of the relief, a franchisor will want to consider a release from the franchisees. If you offer relief/assistance tailored to an individual franchisee, rather than systemwide, evaluate if there are other similarly situated franchisees who should receive the same offer of assistance/relief — some states prohibit a franchisor from discriminating between similarly situated franchisees. Franchisors also should consider asking suppliers and landlords to provide some level of financial relief.
  • Update your franchisees on financial assistance that may become available from government entities. For example, the Small Business Administration (SBA) in designated states is making available low-interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of COVID-19. In addition, the Department of the Treasury is proposing a new $300 billion “business interruption” loan guaranty program, which would still have to be approved by Congress. Public reports describe the program as the U.S. government guaranteeing qualifying small business interruption loans, specifically loans from U.S. financial institutions that provide 100% of six weeks of payroll, capped at $1,540/week per an employee to eligible borrowers (employers with 500 employees or less).

Employment Issues

  • Franchisors need to confirm they are not directing franchisees on how to manage their employees. However, franchisors can provide general guidance regarding employment-related issues, as long as it is clear the franchisor is not mandating a specific course of action. Franchisors can share general guidance from the Centers for Disease Control and Prevention (CDC) and the World Health Organization (WHO). In addition, any such guidance should encourage franchisees to contact the franchisee’s legal counsel for advice, especially as employment laws vary from state to state. Highlighting state paid/sick leave laws as part of the guidance may be a good idea.
  • A one-size-fits-all approach may not be practical for your franchisees given that different areas of the country are being impacted differently and have different local and state government responses and different local and state laws. Thus, allowing franchisees to customize their approach with their employees is both practical and fits within the franchisor’s role in the system and the legal context (joint employer liability risk). It also reinforces that a franchisor and its franchisees must work together. Franchisees need to proactively step up and address these issues with their employees.
  • Fortunately, the new Department of Labor (DOL) joint employer rule reduces a franchisor’s risks regarding joint employer/integrated enterprise issues. A summary of the new rule can be accessed here.
  • Franchisors managing their own employees can take various steps to help ensure the health and safety of employees and customers. An updated employer action guide can be accessed here.
  • Federal legislation referred to as the Families First for Coronavirus Response Act passed the Senate and was signed into law by President Trump.
  • The bill requires 80 hours of paid leave for employees of employers with less than 500 employees for several COVID-19-related reasons. Employers would be obligated to provide notice to employees (once the DOL prepares the notice). After that initial two-week period, up to 10 weeks of expanded leave, paid at two-thirds the employee’s rate (up to an aggregate amount) and available to anyone after 30 days of employment for time to care for others due to COVID-19-related reasons and other circumstances.
  • The reason the bill applies only to employers who employ fewer than 500 employees may be because the government is largely picking up the tab via tax credits, which they want to provide only to small/medium companies. The legislation would expire on December 31, 2020 and unused time would not carry over from one year to the next. For more information, you can access Faegre Drinker’s alert on the subject here.
  • The bill provides additional funds to states that experience higher unemployment claims (Emergency Unemployment Insurance Stabilization and Access Act of 2020). It also loosens unemployment eligibility requirements such as waiting periods. In addition, unemployment benefits may be available to laid off and furloughed workers, as well as to those workers who exhaust their allotted paid leave.

Customer-Facing Issues

Depending on the nature of the brand’s products or services, franchisors should be ready to provide support with customer-facing issues.

  • State or local health department/public safety closure orders and brand-protecting best practices for communicating these orders to customers
  • For fitness or other health/wellness facilities or other systems on a membership model, the implications of closures for membership fees
  • Supporting healthy and safe interactions with customers for businesses that continue to operate
  • Thinking about different ways that the brand can stay connected with customers during these times where customers may not be physically visiting the locations (for example, how to enhance online presence or new and innovative ways to stay connected with customers, as customers will have extra time at home to engage with the brand)

Additional Resources

Here are some additional places to find helpful information:

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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