United States: Current Advice On Joint Employment Concerns For Franchisors And Franchisees

At the end of the following article, you will find several action items which you may find advisable for your franchise system.  We will be happy to provide your company  with a free, no-obligation proposal for implementation of any of all of them.

In the classic children's book "Are You My Mother?" by author P.D. Eastman, a baby bird hatches while its mother is away.  After falling from his nest, the confused young bird sets out on a quest to find her and asks everyone and everything he meets – a cow, a dog, a plane, and more – "Are you my mother?"  After recent decisions from various courts and the National Labor Relations Board ("NLRB"), millions of employees across the U.S. may find themselves similarly wondering, "Are you my employer?!" 

Franchisors and franchisees face concerns and legal risks regarding potential joint employment claims on multiple fronts.  In addition, many businesses (franchising and otherwise) and their suppliers regularly use temporary staffing agencies to provide "temps" to fill open positions on a short-term basis (sometimes for just a particular shift, or sometimes for a period of just a few days, weeks or months).  Though many businesses and suppliers may not view such temporary staff as posing the same legal concerns as their "regular" staff, recent court decisions and administrative actions have found otherwise, and "joint employment" claims are escalating at a rapid pace. 

Likewise, franchisors and franchisees in the business industry have historically viewed employees of franchisees as truly being employed only, and exclusively, by the franchisee, but numerous court decisions have found that both the franchisor and the franchisee can potentially be considered joint employers in this circumstance.  Wise business franchisors and franchisees know how to spot problem areas and to take precautions to minimize legal risks for possible discrimination claims, benefits claims, and unionization efforts.

The "Joint Employment" Concept

Joint employment exists when two or more employers each employ the same employee and either (1) the employers are sufficiently related to each other; or (2) the employee is economically dependent on both employers.  Joint employment concerns exist for both business franchisors and franchisees.  There can be mutual benefits to both franchisor and franchisee to avoid determinations of joint employment.  Where employees of a franchisee are deemed to be joint employees of the franchisor, such can increase the chances that the employees may be considered a combined bargaining unit, thereby increasing the chances for possible unionization of the workers.  Moreover, individual employees (and their attorneys) often like the perceived "deep pockets" that a franchisor may have, thereby increasing the chances that a disgruntled employee might seek to raise a claim against the franchised business location where he/she worked as well as a claim against the corporate franchisor.  Litigation costs for both franchisor and franchisee in such circumstances can potentially be staggering.

Federal government agencies have been actively expanding their definitions of who constitutes joint employers.  In January 2016, the U.S. Department of Labor issued a guidance memorandum stating the DOL should interpret and define the concept of "joint employment" as broadly as possible.  Last Fall, the NLRB reversed its more than 30-year standard for assessing joint-employer status under the National Labor Relations Act in Browning-Ferris Industries of California.  In finding both a staffing agency and site employer to be joint employers, the NLRB stated: 

"two or more entities are joint employers of a single work force . . . if they 'share or codetermine those matters governing the essential terms and conditions of employment.' In determining whether a putative joint employer meets this standard, the initial inquiry is whether there is a common-law employment relationship with the employees in question. If this common-law employment relationship exists, the inquiry then turns to whether the putative joint employer possesses sufficient control over the employees' essential terms and conditions of employment to permit meaningful collective bargaining."

In a strongly worded dissent regarding the decision's broad implications, NLRB Members Philip Miscimarra and Harry Johnson wrote: "No bargaining table is big enough to seat all of the entities that will be potential joint employers under the majority's new standards."

Court Decisions on Joint Employment Issues

Courts looking at the issue of franchisor liability for franchisees' employees tend to ask whether the franchisor in a case was an employer and/or whether the franchisor could be held vicariously liable for the actions of the franchisee (under a theory of agency).  Franchisors and franchisees in the business industry have been a common target for lawsuits alleging discrimination by so-called joint employers.  Although most courts consider the language of the franchise agreement (specifically, provisions stating that the franchisee is an independent contractor or has independent responsibility for all operations and employees of the franchise), this language is not dispositive in determining whether a franchisor is an employer or is vicariously liable. While there is no uniform rule or bright-line test, courts have generally found that a franchisor is not liable as an employer or vicariously liable where the franchisor (1) only provided optional training material on general, broad HR issues to managerial staff on an advisory basis; (2) exercised supervision over employees/operations for a specific purpose that was not related to controlling the employment relationship (such as for quality control); or (3) set guidelines or standards for the franchisee with regard to products, liability insurance, operation and presentation, periodic inspection, use of logo/trademarks, etc. Most courts consider the line to be crossed, however, where the franchisor asserts direction or control in the areas of hiring, firing, supervision, discipline, and discharge.

So What Can You Do?

Below are some of the questions considered in determining whether a franchisor would be considered a joint employer of employees of a franchisee:

What degree of supervision, direct or indirect, did the franchisor have over the work done by the franchisee's employees?

  • Do the Franchise Agreement and Franchise Disclosure Document properly describe and designate who the employer of the workers is?
  • Did the franchisor exercise control over the terms of employment for the franchisee's employees, including assigning job duties and scheduling?
  • Did the franchisor have the right, directly or indirectly, to hire or fire the franchisee's employees?
  • Did the franchisor have the power to assign tasks to the franchisee's employees and supervise their performance?
  • Did the franchisor have the power to determine the pay rates or methods of payment for the franchisee's employees?
  • Did the franchisor prepare payroll or pay wages to the franchisee's employees?
  • Was the franchisor listed as the employer on the franchisee's employees' paychecks or W-2 forms?
  • Did the franchisor provide any employee benefits to the franchisee's employees?
  • Did the franchisor maintain work records for the franchisee's employees?
  • Did the franchisor train the franchisee's non-managerial employees?
  • What degree of involvement did franchisor have in the day-to-day management of the franchisee's employees?
  • Did the employee's uniforms, employment records, training, etc. cause the employees to think that they worked for the corporate franchisor?
  • Did the franchisor influence or exert control over the franchisee's daily operations?
  • Was employee and operational supervision by franchisor exercised for a specific purpose that is different than the control exercised by an employer (for example, monitoring or supervision related to quality control rather than the employment relationship)?
  • Was the franchisor responsible for worker's compensation claims and unemployment insurance for the franchisee's employees?
  • Did the franchisor determine how the franchisee's employees were reviewed, promoted, and disciplined?
  • Was the franchisor involved with the franchisee's human resources matters, by providing assistance with respect to HR issues, mandating HR training, or monitoring the franchisee's HR policies?
  • Did the franchisor share profits with the franchisee or have a financial interest in it besides paying franchise fees or royalty fees?

The more times the answers to questions like those set forth above are "Yes," the more likely it becomes that joint employment may be found.

Additional Possible Steps to Minimize Possible Joint Employment Liability

Recent decisions from courts and the NLRB help to reiterate the importance of having franchisees very specifically and expressly identify for their employees who they are working for.  Franchisors in the business industry should:

Review and revise agreements with suppliers, franchisees, vendors, service providers, etc. to include indemnification agreements;

  • Update Franchise Agreements and Franchise Disclosure Documents to ensure workers are properly designated;
  • Avoid having  franchisor's corporate name on things like the franchisee's workers' paychecks, job applications, employee handbooks, etc.;
  • Some franchisees have their employees sign a document in which the employee expressly acknowledges his/her understanding as to who the employer is (and is not);
  • Utilize in-store signage that expressly states that the location is operated by a franchisee and staffed by employees of the franchisee; and
  • Review and revise agreements with staffing companies to ensure that the staffing company has sole control over the essential terms and conditions of employment such as hiring, firing, discipline, supervision, direction of work, hours, and wages for temporary workers.

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.

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