Expanding risk from joint employer liability has been a hot topic in franchising for the last several years. The current state of joint employer law is complex and changing, however, many prudent franchisors are making safe harbor changes in the way they do business as a precaution to mitigate risk regardless of changes in the law. The following discusses the response to the emerging employment law landscape from the contract drafter’s perspective.
Joint employer liability is a subset of vicarious liability, the doctrine by which a franchisor may be liable for the acts of franchisees if the franchisor exercises too much control. Until recently, the well-established standard for finding a franchisor jointly liable for employment matters required showing that a franchisor maintained direct and immediate control over day-to-day employment matters relating to the franchisee’s employees. In other words, for a franchisor to be held liable as a joint employer, there had to be evidence that the franchisor meaningfully affects matters relating to the employment relationship, such as the direct hiring, firing, and supervision of the franchisee’s employees. That standard was clear and predictable.
On August 27, 2015, the National Labor Relations Board overturned more than thirty years of employment law precedent in the decision of Browning-Ferris Industries of California. In that case, the NLRB established a far more labor-friendly precedent replacing the direct and immediate control standard for determining joint employer status with a vague test based on indirect, reserved, or unexercised control over workers’ terms and conditions of employment. The decision was a seismic shift in the law exposing franchisors to workplace liability for franchisee’s actions.
Joint employer liability since Browning-Ferris is a fractured, rapidly evolving area of law. Approximately eight circuit court standards have emerged for determining joint employer liability under the NLRB’s Fair Labor Standards Act. The NLRB’s sister agencies, the Department of Labor, Equal Employment Opportunity Commission and Office of Federal Contract Compliance Programs all have varying standards for joint employer liability and approximately eighteen state legislatures have responded by enacting protections for franchises. While the current state of joint employer law is mixed, the Browning-Ferris and similar standards hostile to business have the potential for devastating effects on franchising as a business model. According to the International Franchise Association, the primary trade association for franchisors, franchisees, and vendors serving the franchise industry, the expanded joint employer standard has already cost franchise businesses $33.3 billion per year, has resulted in 376,000 lost job opportunities, and led to 93% more lawsuits. The takeaway is that franchisors need to review their business practices and create a strategy for mitigating joint employer risk, including making prudent changes in operations, policies, training and legal documents such as the franchise agreement and operations manual.
Expertly crafted franchise agreement language can be a frontline defense against a joint employer claim. Depending on many factors, favorable franchise agreement provisions have the potential for allowing franchisors to defeat a joint employment claim in the initial motion to dismiss or in the middle stages of litigation, if the franchise agreement supports the fact that the franchisor is not a joint employer. The drafter should focus on ensuring that no provision in the franchise agreement impermissibly provides the right for the franchisor to control activity of the franchisee deemed to be part of the actual daily operation of the franchised business. This includes that the franchisee has sole and complete control over its own employees and that any suggestion affecting employment related matters made by the franchisor are optional and never mandatory. While the drafter needs to be cognizant of employment liability risk throughout the franchise agreement, the following are few of the most significant provisions on which to focus:
- Joint Employer Disclaimer
Consider including an explicit joint employer disclaimer. Such a provision could indicate that employees are solely employed by franchisees and that the parties do not intend to create a joint employer relationship. An effective disclaimer would enumerate what rights are retained by the franchisee and what limitations are on the franchisor. Typically, the franchisee would have the sole right to the hiring, firing, scheduling, assigning, training, promoting, disciplining, and compensating of employees. Such a disclaimer could go a long way to establishing the parties’ intent.
- Independent Contractor
Franchise agreements, like many types of contracts, typically contain a provision stating that the relationship between the franchisor and franchisee is that of independent contractors. Such a provision confirms the franchisor is concerned only with the outcome and does not control the means or methods by which the franchisee performs. A standard independent contractor provision can be strengthened to include specific disclaimers that the franchisor is not a joint employer of the franchisee. If the franchisor has a potentially problematic practice as part of its business model, such as providing franchisees with employment guidelines or training low level employees, it may be helpful to call out that practice and make the case upfront why doing so does not impart joint employer liability.
- Indemnification
Obligations to indemnify the franchisor can be broadened and refined for joint employer issues. This includes disclaiming liability for acts or omissions of the franchisee’s employees and explicitly requiring the franchisee to indemnify the franchisor for any costs incurred in opposing a joint employer claim. Such indemnification could also impart a clear obligation to cooperate with the franchisor in defending any joint employer claim that arises by making available management representatives for hearings and to provide documents requested by the franchisor.
- Compliance with Law
An express obligation for the franchisee to comply with labor and employment laws can be added to a standard obligation to comply with law. A best practice is also to obligate franchisees to obtain and maintain employment practices liability insurance for the term of the franchise agreement.
- Notification Requirements
Each franchisee can be required by the franchise agreement to conspicuously identify itself as an independently owned and operated business. Many franchise systems require franchisees to post a sign to this effect. It may also be worth requiring franchisees to require employees to acknowledge in writing as part of the onboarding process that the employer is solely responsible for all labor, employment matters and decisions. All of these requirements could be set forth in the franchise agreement to help make the case for avoiding joint employer liability.
It is important to keep in mind that contract language alone is not dispositive of the joint employer issue because courts will consider many factors including whether the franchise agreement is consistent with the franchisor’s actual practices. Nevertheless, the importance of a well drafted franchise agreement for the protection of the franchisor cannot be understated.
Kenneth A. Goss is a guest contributor to our website. Ken is the owner of Goss Law Firm, PLLC in Fairfield, Connecticut and focuses his legal practice on commercial and business law matters for emerging and established franchisors, franchisees and independent businesses. Ken can be reached by email at ken@gosslawfirmpllc.com.
