Originally published May 2008
Ask a growing franchisee to name its number one business issue and it's likely that the answer will be simple: hiring and managing staff. Employment issues are far from simple, and so franchisees often look to franchisors for help. Franchisors have much to offer in the way of guidance but often struggle to balance a desire to give franchisees the tools and information they need to be successful employers with the need to remain independent of the employer/employee relationship. The good news for both franchisees and franchisors is that this goal is within reach.
Growing Issues in Employment Law & Liability
Traditionally, the question of whether a franchisor could be held liable for the employment practices of its franchisees depended upon whether the franchisor was the legal agent of the franchisee and/or a joint employer of its employees. In the past, many franchise arrangements addressed these issues by specifically shifting the responsibility for all employment decisions to the franchisee and allowing the franchisor to take a hands-off approach. While this might have been the easiest way to assign risk, it was not always the best way to deal with the underlying employment issues, and left less experienced franchisees unable to take advantage of the franchisor's knowledge and experience.
As employment law has evolved, the risk of potential liability to the franchisor under this type of arrangement has increased. In particular, a number of state anti-discrimination laws (such as those of New York, New Jersey, and California) impose liability upon third parties for aiding and abetting discrimination. Even where a franchisor takes a completely hands-off approach with respect to the franchisee's employees, it may still face potential liability where it knowingly tolerates or condones discriminating practices. In practice, this type of aider and abettor liability now places franchisors in a Catch 22 position. If a franchisor knows of discrimination by the franchisee but fails to act, liability as an aider/abettor may result. Conversely, if the franchisor does take action, that action itself may lead to the imposition of liability as an agent and/or joint employer. This is further compounded by the fact that the size of jury awards and the willingness of juries to give large awards has also increased over the last few years.
Despite these issues, franchisors can help franchisees, particularly by assigning responsibility for employment practices and providing guidance to help identify compliance issues, while franchisees can consider additional protections such as conducting compliance audits to help tackle tricky employment issues.
Assigning Employment Practice Responsibilities
A good franchise agreement should assign the responsibility for employment practice issues to the franchisee. After all, the franchisee is the one running the day-to-day operations of the franchise and is usually responsible for hiring, firing, discipline, and payroll. The franchisor should not mandate particular employment policies or get involved in individual employment decisions. At the same time, however, the franchisor should provide the information and resources necessary for the franchisee to fulfill its role as the employer.
At the outset, the franchisor should affirmatively require that the franchisee ensure compliance with all applicable employment laws. It should also be prepared to take corrective action (perhaps by revoking the franchise) in those situations where the franchisee is not complying with the law. In that way the franchisee remains free to structure its employment practices according to its business plan. Where state or federal law provides employers with a choice with respect to a policy or practice, the decision will rest with the franchisee. At the same time, the franchisor can ensure that all mandatory legal requirements are met, thereby retaining a role in protecting its brand/good name from potentially damaging employment actions.
Where the parties agree on this type of apportionment of risk/responsibility, it is imperative that employees not be confused as to who is the employer. Because of the uniformity and branding considerations associated with a franchise, it is often difficult for the public (and even the employees) to distinguish between the franchisor and the franchisee. As a result, the written materials posted at the workplace and/or distributed to the employees should make clear that the franchisee (and not the franchisor) is the employer. This includes the employment application, bulletin board postings, pay checks, and the employee handbook.
Franchisor Guidance Can Help Identify Issues
Although franchisees should be advised to consult their own employment counsel in establishing and/or reviewing policies and in dealing with particular claims, the franchisor also should feel free to provide general information and guidance. Even simply helping franchisees identify those issues which they need to address can go a long way towards heading off problems. In fact, many franchisors provide training/seminars on relevant issues as a service to their franchisees. For example, Jackson Hewitt, the nation's second largest individual tax preparation company, periodically surveys its franchisees to determine what issues are of most concern to them. It then retains independent employment counsel to provide seminars on those topics at its annual franchisee convention. The company also follows up with the franchisees by way of a post-seminar survey to ensure the training is effective and responsive to their concerns. Training on such things as how to properly interview and hire employees, what to watch for in dealing with discipline/discharge issues, and how to conduct investigations of employee complaints are particularly helpful to franchisees.
Employee training and posting requirements also should be addressed by both parties. Federal law, as well as most states, requires that employers post information summarizing the applicable employment laws on such issues as harassment/discrimination, wage and hour regulations, whistleblowing, and workplace safety. A recent visit to a franchise to interview witnesses with respect to a race discrimination charge revealed that there was not a single required posting on the employee bulletin board. When questioned, the franchise owner simply said "they (the franchisor) never told me anything about that." Nor had the lawyer who represented him on the purchase of the franchise. As a result, the franchisee's simple failure to make the required posting was used against it as evidence of its alleged discriminatory intent. This could have been easily avoided. Providing general guidance as to where the franchise may find the information for the state in which it is operating is a good way for the franchisor to do its part in promoting compliance.
Employment Practice Audits Can Aid With Compliance
For their part, franchisees (especially first-time employers) should not rely solely upon the franchisor for its information. Nor should they rely solely upon off the shelf forms or how-to books in establishing or reviewing their employment practices. Because of variations in state and local laws as well as the constant developments in the law, such materials often contain errors. A comprehensive Employment Practices Audit is the best way to get a handle on whether the business is complying with applicable employment laws and identifying potential areas for improvement. The audit should review everything from hiring and disciplinary policies and procedures to payroll procedures. All written materials such as job applications, handbooks, and leave/benefit policies also should be reviewed for both form and content. Since seemingly straight forward issues (such as the content of the employment application) can have hidden pitfalls, even large employers often find such audits useful.
To help avoid employment practice claims, franchisees also should make sure that their employees are properly trained. A number of states such as California and Connecticut require employers of a certain size to provide anti-harassment and other training to all employees. Moreover, even where such training is not required by law, it can provide a limited defense in the event of a discrimination or harassment lawsuit. As a result, even where the franchise agreement is silent on the issue, franchisees should determine whether training is required or beneficial.
Consider Further Protection
Since even the best efforts and policies cannot guarantee that a lawsuit will not be filed, the franchisee should consider further protection. The cost of defending even a straightforward discrimination case can mean the difference between having a profitable year or not. Despite the recent increases in insurance rates, Employment Practices Liability Insurance still can be an effective and affordable way of minimizing risks. In addition, franchise groups may be able to obtain rates more favorable than those usually available to small employees.
Both franchisors and franchisees have a vested interest in protecting the business from employee lawsuits alleging claims such as wrongful discharge, discrimination, or other improper employment practices. In addition to the obvious economic costs, such lawsuits can affect the branding and good will of the franchise. As a result, franchisors and franchisees should each do their part to reduce the risk of such claims by establishing in advance their respective duties and responsibilities. In the ideal relationship, the franchisee will assume the responsibility of operating the business in compliance with employment laws, and the franchisor will commit to providing it with the type of information and guidance discussed above.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
