When it comes to the franchisor-franchisee relationship, it’s been commonly understood that the franchisee is an independently owned and operated business and is responsible for all employment decisions regarding its employees, and that a franchisor generally has no interaction with or authority over the franchisee’s employees.
But that understanding is increasingly under fire as franchisors are targeted for franchisees’ labor law violations.
In 2014, the National Labor Relations Board (NLRB) hit McDonald’s and several of its franchisees, along with other franchises, with unfair labor practice complaints, asserting that the franchisors are a “joint employer” with those franchisees that allegedly have violated employees’ rights.
That ruling and other recent decisions by the NLRB have heightened concerns among franchisors that the definition of an “employer” is being overly expanded, the common understanding of a franchisor-franchisee relationship is being twisted, and franchisors are being exposed to lawsuits for the actions of their franchisees.
Texas legislature takes action.
In response to the trend, Texas Senator Charles Schwertner introduced legislation aimed at protecting franchisors (S.B. 652), which was signed by Governor Abbott on June 19, 2015. The legislation, effective September 1, 2015, specifies that franchisors won’t be considered employers of, or in a co-employment relationship with, either franchisees or the franchisees’ employees in claims related to employment discrimination, the Texas Minimum Wage Act, workplace safety, wage and hour laws, and the Texas Workers’ Compensation Act, among other laws.
The key issue: who’s responsible for employment decisions?
The NLRB’s general counsel has urged the board to abolish its current “direct control” joint-employer standard and replace it with a “totality of the circumstances” test, one based on whether an alleged joint employer exercises either direct or indirect control over employees who work for another employer. That could further blur the lines of control that typically exist in a franchising relationship, and expand the reach of the National Labor Relations Act (NLRA) to franchisors.
In any event, if a court finds that a franchisor exercises control over its franchisee or the franchisees’ employees beyond what’s necessary to protect the franchisor’s trademarks and brand, the franchisor may not be protected.
What is “necessary” control?
That’s obviously open for interpretation by the NLRB and the courts. But for now, franchisors should carefully review any control or influence they exercise over their franchisees' employees or employment functions. That includes any required system-wide use of software or other technology that goes beyond protecting the franchisor's brand. Here are some examples cited by the NLRB’s general counsel that could indicate franchisor control:
- Keeping track of data on sales, inventory and labor costs
- Calculating the labor needs of franchisees
- Setting and policing work schedules
- Tracking franchisee wage reviews
- Tracking employee performance such as time to fill customer orders
- Accepting and screening employment applications through the franchisor’s system
August Brown-Ferris ruling further complicates the issue.
An August 27, 2015 ruling further complicates this matter. The New York Times reports: “Before the ruling, the prevailing doctrine typically required the parent company to exert “direct and immediate” control over working conditions of employees at its franchisees or contractors to be considered a joint employer. But the ruling moves the standard closer to its more liberal, pre-1980s interpretation. Under the new test, a company can be considered a joint employer even if it has only indirect control over working conditions — say, by requiring the use of certain scheduling software that locks in the timing and length of workers’ shifts — or if it has the right to control certain conditions even if it doesn’t exercise that right.”
For more guidance on protecting your franchise operations, contact the Franchise Channel Division at Heffernan Insurance brokers. We offer insurance, training, certificate tracking, claims benchmarking and other franchise-tailored services. Count on us for assistance with short- and long-term strategy, legal advice, insurance, compliance and health care reform. Watch our video for more information.