Employment Law: Are Franchisors Liable for their Franchisees?

The cornerstone of the historical franchise business model is the concept that the franchisee is independent from the franchisor and is fully responsible for its own legal matters. This is a mutually appreciated tenet by both parties.

Since franchising began, however, claimants have attempted to assert that franchisors should join franchisees in their responsibilities under state law. In recent years, the number of these cases has grown significantly in what some believe is an attempt on the part of unions to organize franchised restaurants and retail businesses.

In July 2014, the National Labor Relations Board (NLRB) announced that it had authorized 43 cases against franchisor McDonald’s USA, LLC for alleged labor violations by its franchisees, including alleged failure to pay overtime, failure to provide required breaks and layoffs related to union organizing activity.

While franchisors often win the legal battles, recent cases have started to illustrate that the issue is far from cut and dry.

Case 1: Patterson v. Domino’s Pizza, LLC, 60 Cal. 4th 474 (2014)

An employee of Domino’s Pizza claimed that, under California’s Fair Employment and Housing Law and tort and common law employment law claims, the franchisor was liable for sexual harassment by its franchisee because it was, in fact, a joint employer. She also claimed that the franchisor was vicariously liable because the franchisee was the franchisor’s agent.

The decision: After the trial court granted judgment for the franchisor, the lower appellate course reversed the decision. The Supreme Court (in a 4 to 3 decision) then reversed in favor or Domino’s as there was no triable issue of fact. Clearly, this was an extremely close decision and could have easily gone the other way if the facts were slightly different.

Case 2: Ambrose v. Avis Rent a Car Sys., Inc., 2014 U.S. Dist. LEXIS 170406 (S.D. Cal. Dec. 8, 2014)

Ambrose operated a Budget Rent A Car business under an “independent operator” agreement (much like a franchise but without the franchise fees). She argued the she was Budget’s employee because the Company had the right to control the manner and means by which she accomplished the results required by the agreement. Budget, on the other hand, argued that Ambrose was not an employee because the Company did not retain direct control over her hours of operation, employee appearance standards, work hours, or wage rates.

The decision: A summary motion was denied and the case will be tried.

Case 3: Hahn v. Massage Envy Franchising, LLC, 2014 U.S. DC LEXIS 147899 (S.D. Cal. Sept. 25, 2014)

A class of customers who had signed membership agreement at one of Massage Envy’s franchised clinics argued that a provision in the agreements that required customers to forfeit unused prepaid massage services when they cancelled their memberships or failed to make timely payments violated the California’s Unfair Competition Law (UCL). Unlike in the Patterson case where the company did not have control over the franchisee’s employment practices, Massage Envy prepared the membership agreements.

The decision: The court denied Massage Envy’s request for summary judgement, saying the company exercised “wide-reaching control” over its franchisees’ day-to-day operations beyond what was necessary to protect its brand and goodwill. This case will be continued in the courts.

So how can franchisors protect themselves against claims by franchisee employees? The biggest way is by carefully examining their franchise agreements and daily practices to maximize franchisee control over terms and conditions of employment. This can include giving franchisees full control over hiring decisions, employee benefits, wages and scheduling and confirming that franchisees retain the responsibility for training their employees, particularly if the training deals with employee relations and anti-discrimination laws.

Franchisors who opt to exercise more influence over the terms and conditions of employment are putting themselves at increased risk of being considered “joint employers” and being held liable for violations of employment law.

Franchisors may want to have their franchise agreements reviewed by a lawyer to protect themselves against potential issues going forward.