NowHiringREV2Franchise agreement recitals declaring your franchisee to be an independent contractor, not an employee, are not dispositive!

Until now, the spotlight has never shined so brightly on franchising and, specifically, on whether franchisors are responsible for their franchisees’ activities.

On July 29, 2014, the NLRB’s General Counsel announced its plan to sue McDonald’s for numerous unfair labor practices at franchisee-owned restaurants, claiming McDonald’s is the joint employer of the franchisees’ workers.  Weeks later, on August 27, 2014, the Ninth Circuit issued twin decisions holding thousands of FedEx Ground drivers were actually FedEx employees, not independent contractors, as FedEx claimed.  While FedEx’s arrangement with its drivers is not a franchise, the rulings expose examples of vulnerable practices that are also found in certain franchise arrangements.  The very next day, the California Supreme Court ruled that franchisor Domino’s was not responsible for sexual harassment allegedly committed by a supervisor at a franchise store, finding that Domino’s did not automatically become a joint employer or responsible for its franchisee’s wrongdoing simply because it set brand standards for running franchise stores.  Rendered in the space of four short weeks, these rulings show just how unsettled and confusing vicarious liability law is for franchisors in today’s business market.

Franchisor business practices are destined to remain in the spotlight as long as the Service Employees International Union – the force behind the McDonald’s case – continues to pursue its agenda of unionizing fast food workers in pursuit of higher wages.  As worker protests over the emotionally-charged living wage issue continue to capture media attention, the spotlight on who’s the “real” boss in a franchise relationship will, and should, worry franchisors.

While things remain unsettled, what practical steps should franchisors take?  What should franchisors do to reduce their legal risks of being found to be a joint employer of their franchisees’ workers or vicariously liable for their franchisees’ workplace injuries?

Here are 12 smart tips for franchisors:

  1. Employee Handbooks:  Do not provide your franchisees with a template employee handbook even if you allow franchisees to modify it for their own use.  It does not matter how skeletal the template may be or if you encourage your franchisees to take the template to their own lawyers to complete and do not complete it for, or with, them.  In a joint employer or vicarious liability case, providing a template employee manual is a bad fact.  Instead, help your franchisees ensure their own compliance with local labor laws by encouraging them to retain the services of qualified labor relations/human resources consultants or other third party providers that offer payroll and outsourced employer functions.  While it is acceptable to recommend a particular service provider, do not limit franchisee options or insist that they use your preferred firm.  If you wish to offer centralized payroll, administrative, or accounting services to franchisees, offer them as optional programs and allow franchisees to select their own third party choices as well.  And, do not accept any revenue from a recommended or approved service provider based on the revenue the provider earns from doing business with your franchisees.  This also would not be a helpful fact in a case probing your status as the joint employer of your franchisees’ employees.  Finally, do not impose repercussions if a franchisee chooses not to use a third party service provider at all or the one that you recommend.
  2. Essential Employment Decisions:  Stay out of your franchisees’ essential employment decisions, such as hiring, firing, disciplining, setting wages and establishing work conditions.  Do not reward franchisees who follow recommended HR policies or penalize those who do not.  Do not screen or approve your franchisees’ hiring decisions even when it comes to their management hires.  Do not threaten to terminate a franchise agreement unless the franchisee fires, disciplines or reassigns a particular employee.  Do not provide franchisees with employee applications or other employee forms; these forms are readily available from Internet websites and outsourced HR service providers.  Do not serve as a sounding board for your franchisees’ employees to air their grievances regarding the franchisee.  If an employee informs you of a labor or employment law or other alleged violation, simply forward the grievance to the franchisee to handle.  Train your franchisees to explain to their workers that they have one boss and work only for the franchisee.
  3. Work Schedules:  Do not set specific work schedules for your franchisees’ workers; each franchisee must do this on its own.  Do not assign franchisees’ workers to perform specific jobs.  It is acceptable to tell franchisees what jobs must be done, but, do not tell the franchisees who must do what.  Do not set minimum hours of work or limit dates of closure; most leases cover these subjects anyway.  If you are concerned that, unless you specify minimum hours, franchisees will dabble, recognize that franchisees have their own overhead to pay and their own profit motives.  If this is not sufficient to ease these concerns, consider adding minimum performance requirements or an express best efforts duty to the franchise agreement and remind franchisees of their contractual obligations.  While it is acceptable to require that franchisees have responsible contact persons available at all times during business hours and to offer recommendations about optimal staffing, do not set minimum staff size requirements for your franchisees.
  4. Mandatory POS Systems:  It is acceptable to require that all franchisees utilize a uniform POS system for collecting and reporting sales data in real/time to you.  However, some POS systems come bundled with software features that help franchisees manage their workforces.  If you cannot unbundle this software, then it is critical that you do not mandate use of its workplace features.  Emphasize that use of these workplace management tools is optional.
  5. Training:  Make the franchisee solely responsible for training its own workforce.  It is acceptable to require that franchisee workers demonstrate minimum competency before you will recognize a particular employee as a supervisor or management-level employee, but make sure to establish training requirements by job title, and not by singling employees out by name.  Keep completion of franchisor-run training programs for workers below the franchisee-owner level as optional.  Do not insist that particular employees complete remedial training.  Explain to franchisees that if their employees execute brand standards poorly, the franchisee will be found to have violated brand standards.  In other words, let breach of the franchise agreement motivate franchisees not to hire untrained or unqualified persons.  It is acceptable to require that franchisee workers participate in some type of “opening training” or instruction on the POS system to ensure smooth operation of the franchise business on its opening day, but limit opening training to matters that you can directly connect to implementing brand standards.
  6. Job Postings:  Do not provide internal job postings that allow an employee of one franchised outlet to apply for work at another franchised outlet or at a company-owned outlet.  While it is acceptable to do this internally to facilitate transfers across your own company-owned locations, do not provide this service to franchisees even if it might benefit them.  Allow franchisees to organize this on their own or through their franchisee association.
  7. Operating Manuals and Other Communications:  Critically review all of your operating manuals, training materials, recruiting materials, and other communications directed to prospective and existing franchisees and revise them to eliminate language that reads like a “top down” control, by avoiding a tone similar to the way in which a supervisor might address subordinate employees.  Avoid expressing operating standards in a way that sounds like workplace rules (e.g., “no employee dressed in improper attire may interact with customers”).  Emphasize brand justifications for each mandatory standard or requirement.  Evaluate practices that are not essential to the brand proposition and either eliminate them or consider making them optional.  While it is acceptable to highlight optional “best practices,” understand that you undermine their optional status if you threaten to terminate a franchisee that fails to implement the best practices.  Do not assume that practices that you identify as “recommended” will be regarded by courts as such if they are universally adopted by all of your franchisees.  Keep in mind that, not only must your manuals and other communications be consistent with your disclosure documents, they must be consistent with your everyday practices.  Offer your field team communications training and periodically get into the field to observe your team’s interactions with franchisees and the franchisee’s staff to ensure that their communication style is consistent with your brand message, they explain requirements by connecting them with a brand reason, and they avoid body language or tone of voice that might be unduly “top-down.”  Remember: you are responsible for your field staff’s interactions as they are your employees.  What they say and the attitude they display in communicating the message will be attributed to you.
  8. Reviews and Inspections:  Reviews and inspections of franchisee operations are acceptable as they are brand justified, but if you see activities that violate brand standards, do not direct your franchisee’s employees on-the-job to make corrections.  Instead, notify the franchisee of the inspection results and let the franchisee implement and supervise corrections.  Make it clear to franchisees that your reviews and inspections of their operations are not in lieu of their own duty to supervise their own operations/workers.  In conversations and especially in any written communications with franchisees, emphasize the franchisee’s independence and entrepreneurial opportunities.  Remind franchisees that they, alone, bear the risks and receive the rewards of their business.
  9. Pricing Controls:  Franchisors: rethink whether it is essential to your brand message that you impose everyday pricing controls, e.g., minimum and maximum resale prices.  Pricing controls directly influence a franchisee’s bottom line.  Consider allowing franchisees to have maximum freedom to set their own prices as this is an important attribute of independence.  This does not mean that you cannot or should not use a network-wide marketing fund to engage in price-specific limited-time advertising.
  10. Inventory Levels, Insurance and Repairs:  Let franchisees determine their own inventory levels and do not set inventory levels for them.  If you retain the right to buy insurance or make repairs at franchisee-owned locations, make sure the franchise agreement language keeps these rights optional.  Do not automatically handle these matters for franchisees.
  11. Employee Uniforms:  Supplying or identifying employee uniforms and requiring that your franchisees’ workers wear them on the job is often cited by those claiming a franchisor is a joint employer as evidence of a franchisor’s control over an essential employment decision.  Uniforms, however, clearly have a brand justification much like the signs that you may legitimately require franchisees to place inside and outside of their franchise location to identify the outlet’s affiliation with your brand.  However, consider offering franchisees a menu of uniforms that vary by color or style and letting franchisees pick from the menu.  While the franchisee’s choices are limited, it allows you a chance to show that franchisees exercise some independent discretion in picking their employees’ uniforms.
  12. Get Smart: Know the Law and Bolster Your Protections:  To keep apace of legal developments during these turbulent times and to avoid high risk activities, hire a full-service law firm that can deliver coordinated seamless franchise and labor law expert advice, adeptly guiding your everyday interactions with franchisees.  Joint employer and vicarious liability cases are highly fact-specific and are judged against a variety of common law and statutory tests of employer or employee.  There is no “one rule fits all.”  Depending on the allegations, different legal tests may be implicated, each with different criteria.  A franchisor operating in numerous states may face different liability risks across the country despite having uniform contracts and comparable interactions with all franchisees.  To properly defend yourself, you’ll need a legal team that thoroughly understands not just the franchise model, but also the numerous employment status tests that potentially apply to your franchisees.  Additionally, have your legal counsel review your franchise agreements to determine if the franchisee’s indemnity duty is broad enough to cover joint employer liability, as well as your own insurance policies to determine if coverage exists for such liability.  Finally, confirm that your franchisees have insurance policies in place that cover joint employer claims and name you as an additional insured.

Rochelle Spandorf chairs Davis Wright Tremaine’s national franchise practice.  Based in the firm’s Los Angeles office, she is a California State Bar Certified Specialist in Franchise and Distribution Law and past chair of the ABA Forum on Franchising.  She was recently recognized by Who’s Who Legal as one of the 10 “Most Highly Regarded Individuals” in franchise law worldwide, one of just six U.S. lawyers included in the ranking, and the only U.S. woman.