United States: FLSA Compliance For Franchises…And The Joint Employer Tightrope

In May, the long awaited Department of Labor's revisions to the FLSA's white collar exemption rules were published and have many employers, including franchisors, concerned with compliance. John Skelton, a partner in our Boston office who regularly counsels and defends franchisors in a wide range of legal matters, recently answered some questions on the issue of franchisee compliance with the FLSA's changed overtime exemption rules and how franchisors can take steps to ensure franchisees' compliance without increasing their exposure to joint employment allegations.

Q. John, you represent franchisors and franchisees in various industries. From your perspective, are franchisees aware of the DOL's revision to the definition of who can be classified as exempt from the FLSA's minimum wage and overtime requirements?

A. Each franchisee's level of sophistication can vary widely. Some are quite sophisticated multi-unit operators with dedicated resources designed to keep up with the latest changes in the law. But there's also no shortage of individual, so-called "mom-and-pop" operators that might not have the resources to keep pace. Such franchisees often expect the franchisor to provide guidance on issues like this. That, of course, creates a dilemma for the franchisor: non-compliance by franchisees can create bad publicity for the brand, but, as recent joint employer cases reflect, franchisors must be careful not to exert control over a franchisee's employment-related actions.

Q. If franchisees are not aware of what they must do to comply, does that place franchisors in jeopardy? Or are the franchisors safely isolated from liabilities that arise from franchisees' failure to follow the FLSA's and other laws' requirements?

A. There's legal and reputational risk for the franchisor anytime a franchisee is in violation of the law. While franchise agreements generally require a franchisee to comply with all laws, including applicable wage and hour laws, if the franchisor takes affirmative steps to ensure compliance, that then creates risk that the franchisor will be deemed a joint employer and liable for any wage violations. The NLRB, the DOL, and other state enforcement authorities are focused on franchise networks and are looking to hold franchisors liable as a "joint employer" for actions by individual franchisees. For example, in 2014 the NLRB issued complaints against McDonald's USA, LLC, as a joint employer with certain McDonald's franchisees. Two years later, the DOL issued Administrator's Interpretation No. 2016-1, which addressed joint employment under the FLSA. And within the last couple months, the New York Attorney General sued Domino's, asserting that the franchisor was a joint employer of workers at ten New York stores and, thus, liable for such workers' alleged unpaid wages.

Quite simply, this is a tricky issue for franchisors. While they must be careful not to create a joint employer situation, franchisors will want their individual franchisees to be aware of relevant changes to laws that affect the franchise operations.

Q. What can franchisors do to reduce or eliminate the risks that franchisees' potential violations might cause?

A. Being mindful not to raise the joint employer risk, franchisors should alert franchisees of relevant changes and remind them of their obligation to make sure that the franchised operations are in compliance with all applicable laws, including relevant wage and hour laws. Whether through bulletins, newsletters, or training programs, franchisors should try to inform franchisees of important changes affecting the franchise operations. Whatever the means, however, the franchisor needs also to emphasize that the franchisee is ultimately responsible for understanding its legal obligations and ensuring that its operation is in compliance. If getting the word out about important changes through a franchisee training programs, the franchisor should: (i) limit attendance to the actual franchisee and not undertake to train lower level managers or workers; (ii) only discuss the general legal requirements, not how they apply to individual operations; and (iii) include an explicit disclaimer that it is up to the individual franchisee to work with its own legal counsel to determine how these rules apply to their operations and that it is up to each individual franchisee to develop and implement their own policies.

Q. As part of the training, can the franchisor simply direct the franchisee to take necessary steps to comply with the law?

A. No. Dictating what a franchisee must do to be in compliance, or how it should structure or manage its workforce, would be significant evidence of the type of control that could give rise to a finding of joint employment. Educating franchisees of their obligations is one thing, telling them what to do is quite another. Also, any training being offered should not be mandatory. Rather, it should only be offered as a benefit for franchisees.

Q. Do you have any pointers for how franchisors should inform and train franchisees about their need to comply, while avoiding joint employment risks?

A. Yes. First, any communication to franchisees via training, bulletin, or newsletter should (i) make clear that the individual franchisee is solely responsible for all employment and personnel matters, including wage and hour compliance, and (ii) urge each franchisee to get independent advice for their particular situation. The franchisor should also make clear that the information being provided is solely for informational purposes and is not intended to be franchisee-specific. Second, the franchisor should expressly disavow any control over the franchisee's employment-related policies or decisions. The franchisee is an independently owned business. Third, if it is going to offer a training program, the franchisor should consider offering the seminar by outside counsel so that it's the lawyer, not the franchisor, providing the information, which reinforces the franchisor's position that each franchisee is responsible for its own employment decisions.

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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