Download Practical and Real World Steps A Franchisor Can Take To Provide

Practical and Real World Steps A Franchisor Can Take To Provide Effective Support
Without Crossing Into Joint-Employer Territory
I. INTRODUCTION: The Increasingly Deep Quagmire of Joint Employment in the
Franchise World
To achieve franchising’s ultimate goal -- the replication of units, each virtually identical
in appearance and operation and operating under a common trademark -- franchisors must
impose upon franchisees a series of operational standards to ensure brand recognition and
consistency. These fundamental operational standards have served as the basis for recent
attempts to peg franchisors as “joint employers” of their franchisees’ employees.
For many years, the National Labor Relations Board (“NLRB”) and case law precedent
have held that in order to be found a joint employer, a franchisor must both have and exercise
“direct and immediate control” over employment matters affecting its franchisees’ employees,
and this control must be “substantial” rather than “limited and routine.” 1 In the last few years,
however, the NLRB has issued decisions that cast this long-standing precedent into serious
doubt. On December 19, 2014, the NLRB General Counsel issued complaints against
McDonald’s USA, LLC (“McDonald’s”) and certain McDonald’s franchisees, alleging that the
franchisees had violated rights of employees working at their franchised restaurants and asserting
that McDonald’s was equally liable with its franchisees for any employment violations as a
“joint employer.” In issuing this decision, the General Counsel recommended that the NLRB
abandon the “direct and immediate control” test and instead look at the “totality of
circumstances,” including whether a franchisor retains “the unexercised potential” to control
employment conditions – based not only on specific contract rights but on the “industrial
realities” of the business relationship. 2
In August 2015, the NLRB dug in further when it issued the Browning-Ferris Industries
of California, Inc. 3 decision. In Browning-Ferris, which involved a general business relationship
rather than a franchise relationship, the NLRB ruled that a business may be found a joint
employer when it reserves contractual rights that may permit it to affect the terms and
conditions of certain employees hired through a third-party intermediary, even where it does not
exercise any actual control over their employment.
As a result of these recent developments, franchisors now face significant confusion
regarding their potential liability as a joint employer for the employees of their franchisees. In
1
See White & Case Client Alert, “Would You Like Joint-Employer Liability With That?” McDonald’s Serves as a
Cautionary Tale for Franchisors and Other Potential Joint Employers,” (Nov. 2014), available at
http://www.whitecase.com/sites/whitecase/files/files/download/publications/would-you-like-joint-employerliability-mcdonalds-serves-cautionary-tale-fra.pdf.
2
Amicus Brief of the General Counsel in Browning-Ferris Industries of California, Inc., NLRB Case No. 32-RC109684.
3
362 NLRB No. 186 (Aug. 27, 2015).
1
4826-5264-3120.1
the typical franchise arrangement, the franchisor develops a business unit model and the
standards that must be adhered to in the course of a franchisee’s operation of the unit. It could be
argued that the business realities of the franchise relationship nearly always give the franchisor
the potential to control or affect employment conditions. Moreover, operational standards
imposed by franchisors may include certain controls that arguably affect the terms, conditions,
and requirements of the labor employed by the franchisee. For example, a franchisor may supply
an operations manual that includes suggestions relating to human resources management, or
assist its franchisees by requiring group training, or by suggesting an hourly maintenance
schedule for a business unit. Under the NRLB’s decision, it is far from clear when these actions
will be held to give rise to a “totality of circumstances” which makes the franchisor liable as a
joint employer.
Worse still, the NLRB decision puts franchisors in a significant quagmire, as it threatens
the very bedrock principles on which franchising is based. A franchisor’s control over
operational standards is not unique to the franchise relationship, but is required under the
Lanham Act, which governs the trademark or service mark license agreement embodied within
every franchise relationship. Under Section 5 of the Lanham Act, a trademark licensor (e.g., a
franchisor 4) must exert control over its licensees’ use of its mark in order to avoid public
deception - - that is, in order to ensure that the mark uniformly reflects the standards of quality,
product/service and other attributes associated with the mark.
The courts universally uphold this precept, holding that quality control is an
indispensable element of a trademark license and that if a franchisor fails to exert sufficient
controls a petition to cancel the federal registration of that trademark under Section 14 of the
Lanham Act may result. 5 Courts similarly hold that franchisors that fail to enforce controls over
their franchisees risk having their licensed marks declared abandoned. 6 Accordingly, if a
franchisor fails to establish, maintain and police standards associated with its marks and also
fails to effectively compel its franchisees to follow those standards, that franchisor risks not only
the problems associated with diffusion or diminishing of the standards associated with the mark
itself -- a significant business problem -- but it also risks losing its right to that mark all together,
an even more significant legal problem. 7
In short, franchisors must now balance the need to exert control over brand standards
with the duty to avoid the appearance of improper control over employee matters. The
Browning-Ferris “totality of the circumstances” test has created, as recognized by the Browning4
Section 45 of the Lanham Act makes clear that franchisors are embraced by Section 5 of the Act.
For a fuller discussion of the Lanham Act implications, please see Kaufmann, Soler, Permesly, and Cohen, A
Franchisor is Not the Employer of its Franchisees or Their Employees, Franchise Law Journal, Vol. 34, No. 4,
Spring 2015, at 458.
6
See, e.g., Taco Cabana International, Inc. v. Two Pesos, Inc., 932 F.2d 1113 (5th Cir. 1991); Kentucky Fried
Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368 (5th Cir. 1977); Dawn Donut Co. v. Hart’s Food
Stores, Inc., 267 F.2d 358 (2d Cir. 1959).
7
Barcamerica International U.S.A. Trust v. Tyfield Importers, Inc., 289 F.3d 589 (9th Cir. 2002).
5
2
4826-5264-3120.1
Ferris dissent, “an analytical grab bag” that invites significant litigation regarding the facts and
circumstances of the particular franchisor-franchisee relationship at issue and that threatens to
up-end a century of judicial decisions recognizing a franchisor’s obligation to protect its
trademark and service marks, and achieve the uniformity which consumers demand and expect,
through operational standards and controls. 8
The ultimate impact of the NLRB’s position in McDonald’s, which is currently being
challenged, is yet to be determined. In the meantime, the recent decisions by the NLRB
concerning joint-employer liability provide little in the way of concrete guidance to franchisors
seeking to structure their franchise relationships so as to comply with the NLRB’s advice and
avoid potential joint liability. This paper reviews the key cases and standards involving the joint
employer question and, using findings espoused in recent matters, attempts to provide
franchisors with practical considerations to potentially reduce joint employer exposure. 9
II. DISCUSSION
A. Applicable Employment and Labor Statutes and Tests
Myriad federal statutes, and accompanying regulations, prohibit private sector employers
from certain conduct regarding employees (e.g., discrimination or harassment because of
protected class status) or impose affirmative obligations (e.g., to pay at least minimum wage and
time and a half for hours worked in excess of forty in a workweek; to provide reasonable
accommodation to qualified individuals with disabilities). Examples of such statutes include the
National Labor Relations Act, 10 Title VII of the Civil Rights Act of 1964, 11 the Family and
Medical Leave Act, 12 the Americans With Disabilities Act, 13 The Fair Labor Standards Act, 14
the Occupational Health and Safety Act, 15 and the Age Discrimination in Employment Act.16
Every state has passed laws similar, but typically not identical, to at least some of these federal
laws; creating a burdensome obligation to comply with both federal law and the law in each state
in which an employer does business. The one fundamental commonality among these laws is
that they normally don’t apply when the alleged wrongdoer entity is not the (or “an”) employer
of the allegedly wronged employee or employees.
8
Litigation could involve issues, for example, concerning statutory coverage of franchisees’ workers for overtime
pay, financial recovery where misclassifications are made in regard to whether such workers are exempt or nonexempt from overtime pay, and being held responsible to ensure future compliance of franchisees with regard to the
overtime and other FLSA requirements.
9
The ideas set forth in this article are intended to provide guidance only and do not constitute legal advice.
Franchisors should consult with an attorney regarding the particulars of their franchise relationships.
10
29 U.S.C. §158 (prohibiting employers from committing unfair labor practices)
11
42 U.S.C. §2000e-2
12
42 U.S.C. §§ 2612, 2614-2615
13
42 U.S.C. §12112
14
29 U.S.C. §206, 207
15
29 U.S.C. §654, 660
16
29 U.S.C. §623
3
4826-5264-3120.1
No universal test exists to determine whether an entity an employment relationship exists
between an entity and workers for purposes of employment statutes. The statutes define key
terms such as “employer” and “to employ” in broad terms. For example, the FLSA defines an
employer as “any person acting directly or indirectly in the interest of an employer in relation to
an employee.” 17 The ADEA defines “employee” as “an individual employed by any employer . .
. .” 18 Such circular definitions provide little help in determining whether an entity such as a
franchisor is a joint employer of workers employed by another entity such as a franchisee.
The courts and administrative agencies responsible for enforcement of the laws have
supplied tests and criteria for determining joint employer status. The Supreme Court of the
United States has directed that employment relationship determination for FLSA purposes must
be driven by the “economic reality rather than technical concepts.” 19 Guided by this direction
and a United States Department of Labor joint employment regulation, 20 the federal courts have
developed multi-factor tests applicable in FLSA cases involving franchise operations and other
possible joint employment situations. 21 The list of factors include whether the alleged employer:
(1) had the power to hire and fire the employees, (2) supervised and controlled employee work
schedules or conditions of employment, (3) determined the rate and method of payment, and (4)
maintained employment records. 22
As discussed below, the National Labor Relations Board altered its joint employment test
under National Labor Relations Act significantly in its Browning-Ferris Industries of California,
Inc. decision in 2015. Under BFI, the NLRB “may find that two or more entities are joint
employers of a single work force if they are both employers within the meaning of the common
law, and if they share or codetermine those matters governing the essential terms and conditions
of employment.” 23 Specifically, the Board made it clear that it would no longer require evidence
of the actual exercise of control, but would deem “reserved authority” sufficient. 24 It also said
that “indirect control” was sufficient; the Board would no longer require the control to be
17
29 U.S.C. §203(g). State law definitions may vary significantly from federal ones and from state to state. For
example, the definition of “to employ” for purposes of the California Labor Code applicable in minimum wage
actions is “(a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit work, or (c)
to engage, thereby creating a common law employment relationship.” Ochoa v. McDonald’s Corp., 2015 LEXIS
129539, *8 (N.D. CA 2015)(citing Martinez v. Combs, 49 Cal.4th 35, 64, 231 P.3d 259 (2010)).
18
29 U.S.C. §630(f).
19
Goldberg v. Whitaker House Coop., 366 U.S. 28, 33 (1961).
20
The regulation states, among other things, that joint employment will be considered to exist “[w]here the
employers are not completely disassociated with respect to the employment of a particular employee and may be
deemed to share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is
controlled by, or is under common control with the other employer.”
21
See, e.g., Cordova v. SCCF, Inc., 2014 U.S. Dist. LEXIS 97388, * 8-12 (S.D. N.Y. 2014); Johnson v. Serenity
Transportation, Inc., 205 U.S. Dist. LEXIS 148384, *26-30 (N.D. CA 2015).
22
Id.
23
2015 NLRB LEXIS 672, * 6 (2015).
24
Id.
4
4826-5264-3120.1
direct. 25 The Board’s abandonment of parts of its previous standard (the requirements of direct
and actual exercise of control) alarmed many employers in and beyond the world of franchise. 26
On the Title VII front, the joint employment test to be applied in a franchise case – or any
other alleged joint employment situation – varies somewhat depending upon the jurisdiction.
Some of the federal courts will apply some version of a “common law” test focusing on
traditional aspects of control over the employees’ work, working conditions, and compensation
and benefits. 27 Some courts will apply an “economic realities” test requiring consideration of
“[a]ll factors relevant to the particular situation” to ascertain the “economic reality of an alleged
joint employment relationship.” 28 Some courts will apply some combination or conflation of
tests derived from FLSA or NLRA joint employment cases. 29 From this somewhat confusing
morass of Title VII joint employment decisions, franchisors should hope that the bottom line is,
as one court said, that “a franchisor is not a joint employer unless it has significant control over
the employment relationship.”30
B. Ramifications of Joint Employer Status
Being adjudged a joint employer means exposure to the cost of continued litigation and
ultimately exposure to the remedies and damages available to plaintiffs under the labor and
employment statutes. Even in single plaintiff cases, the exposure can be significant. Litigating a
case through to judgment before a judge or jury can cost $100,000 or more. And if the employer
loses, the damages and the incurred attorneys’ fees can hurt the business. The following types of
damages are available in a case involving a termination:
•
Back pay (from the date of termination to the date of judgment)
•
Front pay (from the date of judgment to some future date)
•
Compensatory damages including damages for emotional distress
25
Id. *7-8.
As discussed in detail below, the NLRB picture remains cloudy after BFI. The announced standard is amorphous
and apparently broad. And BFI was not a franchise case. The Board has not decided a franchise case since BFI.
Before BFI, the Board’s Office of the General Counsel - Division of Advice issued an advice memorandum
concluding that a franchisor – Freshii Development – was not a joint employer of one of its franchisees’ employees.
NLRB Office of the General Counsel, Advice Memorandum 177-1650-0100 (April 28, 2015).
27
See Faush v. Tuesday Morning, Inc., 808 F.3d 208, 213 – 215 (3rd Cir. 2015); Stepan v. Bloomington Burrito
Group, LLC, 2014 U.S. Dist. LEXIS 176084, * 1-6 (D. Minn. 2014)(in reverse discrimination case against
franchisor, stating that “finding that companies are joint employers is proper when one company retains for itself
sufficient control over the terms and conditions of employment of the employees who are employed by the other
employer.”)
28
Courtland v. GCEP-Surprise, LLC, 2013 U.S. Dist. LEXIS 105780, *6-7 (D. AZ 2013).
29
See Butler v. Drive Auto Indus. of Am., Inc., 793 F.3d 404, 413-414 (4th Cir. 2015)(hybrid common law and
“economic realities” test); EEOC v. Skanska USA Building, Inc., 550 Fed. Appx. 253, 256 (6th Cir. 2013)(“Entities
are joint employers if they share or co-determine those matters governing essential terms and conditions of
employment”).
30
Courtland, 2013 U.S. Dist. LEXIS at 8-9 (emphasis added).
26
5
4826-5264-3120.1
•
Punitive damages for willful violations
•
Attorneys’ fees to the prevailing party (which can exceed the amount of
damages recovered)
•
Costs of suit incurred by the prevailing party
•
Interest on some of the damages award
In actions of unpaid wages, including FLSA actions for unpaid minimum or overtime
wages, liquidated damages increase the exposure. For example, in an FLSA action, the court
must also award liquidated damages in the amount of the unpaid wages recovered in the action
(i.e., double damages). 31 This liquidated damages means that a franchisor can end up on the
hook for double the amount of wages a franchisee failed to pay during a two year period; which
can increase to three years for willful violations.32 Under some state laws, plaintiffs may recover
triple damages in actions for unpaid wages. 33
In actions and proceedings under the National Labor Relations Act, the franchisor joint
employer may find itself responsible to bargain with a union regarding the terms and conditions
of employment of employees the franchisor believed that it did not even employ. Collective
bargaining, especially for a first contract, can take many months, even years, and involve strikes,
unfair labor practices, attorneys’ fees, and bad publicity. And when bargaining results in a
collective bargaining agreement, the franchisor will find itself with new, long-term obligations to
a union. In unfair labor practices, a franchisor may find itself liable for wages lost by an
employee fired by a franchisee in violation of the National Labor Relations Act.
Class actions against franchisors as joint employers up the ante even more. Franchisors
have successfully beaten back some putative class actions by proving that they do not employ the
franchisee class action plaintiffs. 34 But even ultimately unsuccessful class action litigation
imposes additional costs. The cost of settling a class action case once a court deems the class
action proper escalates dramatically.
The goal is to avoid litigation altogether. Litigation avoidance may be possible by
avoiding the most visible signs of joint employment such as becoming openly involved in
franchisees’ personnel issues or attempts to organize franchisee employees. The more
franchisees remind franchisee employees that the franchisee entity employs them, the less likely
it becomes that franchisee employees and their lawyers think to sue the franchisor.
31
29 U.S.C. §216(b)
29 U.S.C. §255(a)
33
M.G.L. ch. 149 § 150
32
34
See, e.g., Vann v. Massage Envy Franchising LLC, 2015 U.S. Dist. LEXIS 1002 (S.D. CA 2015)(Massage
therapist’s class action complaint for unpaid minimum wages under California law dismissed because court found
based upon undisputed facts that franchisor was not a joint employer).
6
4826-5264-3120.1
The joint employer cat is out of the bag to a large extent, however, and franchisors must
resign themselves to this risk of suit. Once franchisee employees sue the franchisor, the
franchisor‘s goal becomes an early exit through a motion to dismiss or a motion for summary
judgment. Franchisors’ lawyers scrutinize complaints to determine whether the plaintiff
employees have alleged facts which if true would suffice to establish joint employer status. Even
though in deciding an early motion to dismiss a court must accept the facts stated in the
complaint as true, some franchisors have nevertheless escaped early from litigation this way. For
example, in Andrade v. Arby’s Restaurant Group, Inc., the plaintiff sued her supervisor, the
franchisee employer, and the franchisor Arby’s Restaurant Group (“ARG”) alleging severe
sexual harassment by the supervisor. 35 The court granted ARG’s motion to dismiss because the
plaintiff had not alleged facts showing that ARG controlled her employment or the franchisee’s
employment of her. 36 More typically, however, the plaintiff figures out what to allege in the
complaint and the case gets over this initial hurdle. 37
The next best thing to getting out early on a motion to dismiss is getting out a bit later via
a motion for summary judgment. A franchisor succeeds on summary judgment by showing that
(a) the parties dispute no material facts and (b) under such facts, the franchisor has the right to
judgment in its favor. Because summary judgment normally wait until the parties complete
some or all discovery, the franchisor still incurs substantial costs and fees in conducting
discovery and assembling its summary judgment materials. Success means avoiding a trial or
having to settle to do so. Examples of franchisors beating back the joint employer attack with a
summary judgment shield include Courtland v. GCEP-Surprise, LLC, Vann v. Massage Envy
Franchising LLC, and Patterson v. Domino’s Pizza, LLC. 38 At the summary judgment stage, the
court will carefully scrutinize the facts relevant to joint employment under the applicable test.
So the key to success is to avoiding even a factual dispute about whether the franchisor crossed
any joint employment lines.
C. Recent Decisions Interpreting Joint Employment
Since late 2014, the NLRB has issued several decisions in both franchise and nonfranchise cases that bear on the question of whether a franchisor may be deemed the joint-
35
Andrade v. Arby’s Restaurant Group, Inc., 2015 U.S. Dist. LEXIS 150031 (N.D. CA 2015).
Id. p.*11.
37
See, e.g., Cordova v. SCCF, Inc., 2014 U.S. Dist. LEXIS 97388, * 8-12 (S.D. N.Y. 2014)(Plaintiff survived
franchisor’s motion to dismiss FLSA and New York State Labor Law action because court determined that
franchisor had alleged, among other things, that franchisor provided materials for training store managers and
employers and monitoring employee performance; retained the right to audit compliance with required policies and
practices regarding employment; and mandated use of certain systems for tracking hours and wages and for
retaining payroll records).
38
Courtland v. GCEP-Surprise, LLC, 2013 U.S. Dist. LEXIS 105780 (D. AZ 2013), Vann v. Massage Envy
Franchising LLC, 2015 U.S. Dist. LEXIS 1002 (S.D. CA 2015), Patterson v. Domino’s Pizza, LLC, 60 Cal. 4th
474, 333 P.3d 539 (2014)
36
7
4826-5264-3120.1
employer of its franchisees’ employees. Before discussing these decisions, it is important to
understand what the NLRB is, and what it can and cannot do.
The NLRB is a federal agency created to enforce the National Labor Relations Act
(“NLRA”), which guarantees basic rights of private sector employees to organize unions, engage
in collective bargaining, and take collective action. The NLRB is governed by a five-person
Board and a General Counsel, all of whom are appointed by the President of the United
States. The General Counsel acts as a prosecutor and the Board acts as an appellate judicial body
from decisions of its administrative law judges. Employees, employers and unions who believe
their rights under the NLRA have been violated may file charges with their nearest NLRB
regional office. The NLRB, in turn, investigates such charges to determine whether they have
merit. If charges are found meritorious, complaints are issued. Complaints that are not
voluntarily settled are decided by the NLRB’s adjudicative arm. Once the Board has decided the
issue, it is the General Counsel's responsibility to uphold the Board's decision. Where parties do
not voluntarily comply with the NLRB’s orders, the NLRB may seek enforcement of its orders in
the U.S. Courts of Appeal. Alternatively, parties to cases also may seek review by the Federal
Courts. In short, unless and until an NLRB decision is overturned by a Federal Court, the NLRB
has the power to make and change laws affecting labor relations conduct.
In light of the above, it is also important to understand the overall context in which the
NLRB decisions have been made. The NLRB General Counsel has publicly expressed the
concern that franchising and other types of business relationships threaten to create a “fissured
workplace” in which the employer/employee relationship is diffused, thereby making collective
bargaining more difficult. 39 Franchise relationships were specifically targeted as having the
potential to cross the line from typical “brand controls” into joint employer liability. Yet in its
decisions, the NLRB has been far from clear as to precisely what conduct by franchisors will be
found problematic. Moreover, the NLRB’s decisions may be inconsistent with existing case law
precedent and may have prompted the development of an even more rigorous federal standard
promulgated in early 2016 by the U.S. Department of Labor (“DOL”). We review some of the
more significant decisions below.
The McDonald’s Complaints 40
The NLRB widely attracted the attention of the franchise community on December 19,
2014, when the NLRB General Counsel Richard Griffin, Jr., following through on previously
enunciated threats, issued Complaints against certain McDonald’s franchisees alleging that they
had violated the National Labor Relations Act (“NLRA”) and the rights of employees working at
their franchised restaurants at various locations around the country through a series of violations,
39
See Rochelle Spandorf, Twelve Tips for Licensor to Reduce Joint Employer Risks under Today’s Legal
Standards—Revisited, Business Law Today (a publication of the American Bar Association), Feb. 2016 (discussing
the NLRB General Counsel’s speech at the ABA Forum on Franchising in October 2015).
40
For the consolidated NLRB complaints, see McDonald's USA, LLC, et al. and Fast Food Workers Committee and
Service Employees International Union, CTW, CLC, et al., NLRB Case No. 02-CA-098389, et al.
8
4826-5264-3120.1
including discriminatory discipline, reductions in hours, discharges, and allegedly coercive
conduct towards employees who engaged in union activity. 41
Most significantly, the NLRB General Counsel asserted that McDonald’s was equally
liable for the aforementioned violations as a “joint employer” of its franchisees’ employees,
because McDonald’s allegedly possessed and/or exercised control over the labor relations
policies of its franchisees. The NLRB’S Complaints were not accompanied by a decision,
memorandum, or report illuminating the logic behind it. 42
McDonald’s maintains, among other arguments, that it does not set employee wages or
hire/fire employees and therefore should not be held the joint employer of its franchisees’
employees.
Patterson v. Domino’s Pizza LLC 43
Demonstrating the potential conflict between the NLRB decision and existing case law
precedent, the McDonald’s Complaints were issued just a few months after an important decision
by the California Supreme Court in Patterson v. Domino’s Pizza LLC, which came to an entirely
different conclusion. 44 In Domino’s, the employee of a franchised Domino’s restaurant sued her
direct employer, the Domino’s franchisee, as well as the Domino’s franchisor, alleging sexual
harassment by her supervisor. She alleged that there was an agency relationship between the
franchisee and franchisor and thus that she and her supervisor were employees of both the
franchisee and franchisor.
The trial court granted summary judgment for Domino’s, finding that because Domino’s
did not control the day-to-day operations or employment practices of the franchisee, neither an
agency nor employment relationship was created that could subject Domino’s to any liability for
the supervisor’s misconduct. 45 The California Court of Appeals reversed the trial court’s
decision, holding that the operational standards and procedures imposed by Domino’s exerted
the type of day-to-day control that could subject Domino’s to vicarious liability for the acts of
the franchisee’s supervisor. 46
The California Supreme Court reversed the Court of Appeals decision, based on finding
that Domino’s lacked the general control of an “employer” or “principal” over relevant day-to41
The allegations include restrictions on employees communicating with union representatives and other employees
about union membership and happenings.
42
See Kaufmann, Soler, Permesly, and Cohen, at 448. Some have speculated that McDonald’s comprehensive
computer system, which tracks the labor usage, and costs and schedules the franchisees’ employees’ work
schedules, is a means of controlling its franchisees’ operations, including employment decisions, and therefore may
have contributed to the NLRB’s decision.
43
Patterson v. Domino’s Pizza LLC, 60 Cal.4th 474, Supreme Court of California, Aug. 28, 2014 (hereinafter
Patterson).
44
Patterson at 503-504.
45
(Trial court decision not published.)
46
The California Court of Appeals decision is Patterson v. Domino’s Pizza, LLC et al., 143 Cal.Rptr.3d 396.
9
4826-5264-3120.1
day aspects of the employment and workplace behavior of the franchisee’s employees. 47
Further, the California Supreme Court held that uniform marketing and operational plans cannot
automatically impose liability on the franchisor for the actions of a franchisee’s employees.
Rather, to be potentially liable, the franchisor must retain or assume “a general right of control
over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day
aspects of the workplace behavior of the franchisee’s employees.” 48
In concluding that Domino’s lacked the requisite level of control to be subject to liability,
the California Supreme Court relied primarily on language from the parties’ franchise agreement
and the franchisee’s day-to-day control over its employees, including the establishment by the
franchisee of its own anti-harassment policy and training. The court also found it relevant that it
was the franchisee who made the decision to discipline the employee who engaged in the alleged
misconduct, that the franchise agreement did not give Domino’s any right or duty to control
employment matters for the franchisee, and that, on a functional level, it was the franchisee, and
not the franchisor, who exercised sole control over hiring, firing, supervising, managing,
scheduling and paying its employees, among other aspects of the franchise relationship.
On its face, the Domino’s decision appears to establish a much higher standard for joint
employer control than do the McDonald’s Complaints. But it must be noted that the decision is
explicitly kept narrow by some of the court’s statements. The court expressly declined to
address how (or if) its opinion might apply to franchise or distribution models that do not fit
within what it calls the “business format” model. 49 It is also notable that the decision was a
closely divided ruling (4-3), leaving additional uncertainty as to whether the next time a similar
case is considered by the California court system, it will come out the same way.
It is also worth noting that the Domino’s decision concerned only an isolated incident at a
single franchisee, while the conduct complained of by the NLRB in the McDonald’s case
involved a series of complaints at various franchisees across the country. It is plausible, then, that
the NLRB’s decision was motivated by what it alleged were a set of pervasive practices at a
series of McDonald’s, as opposed to an isolated incident at a single Domino’s franchise. If this
is the case, the NLRB certainly did not come out and say so.
The NLRB Advice Memorandum Re Freshii 50
Just a few months after McDonald’s Complaint, the NLRB Office of the General Counsel
issued an Advice Memorandum in the case of In Re Nutritionality, Inc. d/b/a/ Freshii, which
appeared to indicate a pull-back of the McDonald’s reasoning. The Freshii case involved a
47
See Patterson at 499 and 503.
Id. at 478.
49
Id. at 478
50
Advice Memorandum, NLRB Office of General Counsel, re: Nutritionality, Inc. d/b/a Freshii, Cases 13-CA134294, 13-CA-138293, and 13-CA-142297 (April 28, 2015).
48
10
4826-5264-3120.1
union organizing effort at a Freshii “fast casual” restaurant owned in Chicago by single unit
franchisee, Nutritionality Inc. The franchisee terminated certain employees who were attempting
to organize an employee union, and the NLRB’s regional office requested advice from the
NLRB General Counsel as to whether the franchisor, Freshii Development, LLC, or its
development agent for the Chicago region, could be held liable for such termination as a joint
employer of its franchisee.
The parties’ franchise agreement implemented a number of fairly standard controls over
operations, marketing and other aspects of the franchisee's business consistent with “business
format” franchising. The franchisor also provided its franchisees with an operations manual that
included suggestions (but not requirements) for human resources management as well as a
sample employee handbook which the franchisees were under no obligation to us. Unlike
McDonald’s, the franchisor required point-of-sale (“POS”) software system did not include a
labor scheduling component, and there was no evidence that it injected itself into human
resources management of its franchisees.
The franchisor deployed a development agent system that engaged franchisees in
recruitment, training and support of other franchisees, in exchange for a revenue split with the
franchisor. The development agent did not have any direct contractual relationship with the
franchisees. The franchisor would delegate certain of its contractual duties to the development
agent, including the off-site and on-site training of each new franchisee and its store staff. After
opening, the development agent would monitor store operations and send notes to the franchisee
about any observed deficiencies or areas of noncompliance. There was no evidence that any
franchisee employee was disciplined or dismissed because of any comment or note from a
development agent.
Based on these facts, the NLRB General Counsel advised that the franchisor was not a
joint employer with its franchisee. The essential thrust of the NLRB’s Advice Memorandum was
that the franchisor’s control over the franchisee’s operations, as implemented through the
development agent, were “limited to ensuring a standardized product and customer experience,
factors that clearly do not evince sharing or codetermining matters governing the essential terms
and conditions of employment.” Central to the NLRB’s conclusion seemed to be language in the
franchise agreement that made explicit that, while the franchisor provided guidance on human
resources matters, the franchisee had the power to decide whether to adopt the franchisor’s
personnel policies, and the franchisee had, in fact, created its own employee handbook with its
own personnel policies. Moreover, despite the franchisee’s request for advice on its employees’
organizing efforts, the franchisor had remained silent and did not instruct the franchisee on how
to respond.
11
4826-5264-3120.1
Based on these factors, the NLRB determined that Freshii was not a joint employer.
Browning-Ferris Industries v. Sanitary Truck Drivers 51
As discussed briefly above, the NLRB’s watershed decision, Browning-Ferris Industries
of California, Inc. v. Sanitary Truck Drivers Local 350, International Brotherhood of Teamsters,
did not involve a franchise relationship at all. In that case, Browning-Ferris Industries of
California (“BFI”), a waste management company, contracted with a third-party staffing agency,
Leadpoint, to supply approximately 60 contract employees (the “Leadpoint employees”) to
work at its recycling facility at Newby Island, California. Most of BFI’s direct employees (the
“BFI employees”) worked outside the facility. The BFI employees were represented by the
Teamsters Union, who filed a petition seeking to represent the Leadpoint employees. The
Regional Director at the NLRB concluded BFI and Leadpoint were not joint employers, and the
Union filed a request for review of that decision by the NLRB.
BFI argued that, based on existing precedent, a joint employer had to retain the authority
to control terms and conditions of the employees’ employment and to also exercise the authority
“directly” and “immediately,” which it could not do in the case of the Leadpoint employees. The
NLRB disagreed but, rather than confine its decision to the peculiar facts and circumstances at
issue, elaborate on the new joint employer test that it had been suggesting since the McDonald’s
Complaint. The NRLB held:
(i)
two or more entities are joint employers of a single workforce if they are both
‘employers’ within the meaning of the common law and they share or
codetermine those matters governing the essential terms and conditions of
employment;
(ii)
a joint employer may exercise control over terms and conditions of employment
indirectly through an intermediary; and
(iii)
most importantly, a joint employment relationship may exist even where the joint
employer does not actually exercise any control over employees’ terms and
conditions of employment, but (based on a contract or otherwise) has the
contractual right to do so. 52
Applying this new joint employer test to the facts of Browning-Ferris, the NLRB
considered whether BFI had control over the hiring and firing of Leadpoint’s employees,
51
Browning-Ferris Industries of California, Inc., d/b/a BFI Newby Island Recyclery, and FPR-II, LLC, d/b/a
Leadpoint Business Services, and Sanitary Truck Drivers and Helpers Local 350, International Brotherhood of
Teamsters. Case 32–RC–109684, 362 NLRB No. 186 (August 27, 2015).
52
Id.
12
4826-5264-3120.1
whether BFI exercised supervision, direction of work and the hours of Leadpoint’s employees
and whether BFI dictated the wages paid to such employees. The NLRB found that BFI
exercised control over the “the processes that shape” the day-to-day work of Leadpoint’s
employees, unilaterally controlling the speed of and the streams and specific productivity
standards for the waste and recyclable materials that the employees sorted.
Further, while communicating to Leadpoint employees through Leadpoint supervisors,
BFI assigned specific tasks that needed to be completed, specified where Leadpoint employees
were to be positioned, and provided near-constant oversight of employee work performance.
Moreover, on many occasions, BFI managers met directly with Leadpoint employees and
provided detailed work directions regarding the stream of materials, addressed customer
complaints and business objectives, discussed preferred work practices, and assigned employees
to tasks that took precedence over work assigned by a Leadpoint manager. BFI specified the
number of workers that it required, dictated the timing of work shifts, and decided when
overtime would be necessary. In addition, the Board found that BFI played a significant role in
determining Leadpoint employee wages. Finally, although under the BFI/Leadpoint contract,
Leadpoint determined employee pay rates, administered payments, retained payroll records, and
was responsible for employee benefits, it was critical that Leadpoint was contractually barred
from paying its employees more than any BFI employees performing the same work.
Green JobWorks LLC / ACECO, LLC 53
In late 2015, the NLRB’s Regional Director was asked to decide another joint
employment matter, Green JobWorks LLC / ACECO, LLC, concerning the question of whether
an environmental remediation contractor, ACECO, LLC, was a joint employer with its employee
staffing firm, Green JobWorks LLC.
Under the parties’ agreement, Green JobWorks was exclusively responsible for: (1)
employee recruiting, hiring, counseling, discipline and discharge; (2) establishing and paying
employee wages; (3) providing worker’s compensation insurance and fulfilling unemployment
compensation obligations; and (4) maintaining personnel and payroll records for Green
JobWorks employees. The general contractor for the project (a third party not involved in the
dispute) provided project orientation and determined day-to-day schedules.
The Union asserted that ACECO was a joint employer because: (1) the Master Labor
Services Agreement gave ACECO the right to direct managers and supervisors, and to dismiss
staff employees under certain circumstances; (2) ACECO had requested specific Green
JobWorks employees with particular skills; and, (3) ACECO effectively controlled the wages of
Green JobWorks employees.
Revisiting the expanded new joint employer test of Browning-Ferris, the NLRB rejected
the Union’s argument and held that there was no joint employment relationship. The NLRB
53
Green JobWorks LLC/ACECO, LLC, NLRB Case No. 05-RC-154596 (Oct. 21, 2015).
13
4826-5264-3120.1
based its holding on the fact that Green JobWorks had the option to reject specific labor requests
and that employees could individually negotiate higher wages, that Green JobWorks was not
prohibited from paying its employees more than ACECO paid its employees and that ACECO
was a subcontractor who did not determine the job tasks for, or have day-to-day supervision
over, Green JobWorks employees.
Though the NLRB did not ultimately impose joint employer liability, its holding was
based solely on the facts rather than a change in the expanded new joint employer test of
Browning-Ferris. However, the Green JobWorks decision injects further uncertainty into the
scope of the NRLB’s reasoning – in particular, its acceptance of ACECO’s ability to fire certain
employees appears inconsistent even with pre-Browning-Ferris precedent. Nonetheless, it can
reasonably be read to highlight the importance of affording discretion to the direct employer
(e.g., franchisee) to make decisions that would not comply with the suggestions of the ostensibly
controlling party (e.g., franchisor).
The U.S. Department of Labor’s Broader, Separate Standard for Joint Employment 54
On January 20, 2016, the DOL’s Wage & Hour Division issued a new Administrator’s
Interpretation setting forth the DOL’s own joint-employer standard – separate from that of the
NLRB. The DOL’s interpretation regarding what constitutes joint employment applies for
purposes of enforcing the provisions of the Fair Labor Standards Act (“FLSA”), which is the
main federal law governing overtime pay and exemptions. The Administrator’s Interpretation
adopts an expansive definition of joint employment which exceeds even the definition put
forward by the NLRB.
Under the Administrator’s Interpretation, the DOL recognizes two types of joint
employment:
(1) Horizontal joint employment exists “when two (or more)
employers each separately employ an employee and are
sufficiently associated with or related to each other with respect to
the employee.” An example of a situation where a horizontal joint
employment might exist is where two separate franchise
restaurants share economic ties, have overlapping staff and
supervisors, and share payroll functions.
(2) Vertical joint employment exists “where the employee has an
employment relationship with one employer…and the economic
realities show that he or she is economically dependent on, and
thus employed by, another entity involved in the work.” Perhaps
54
U.S. Department of Labor, Wage and Hour Division, Administrator’s Interpretation No. 2016-1, re: Joint
employment under the Fair Labor Standards Act and Migrant and Seasonal Agricultural Worker Protection Act
(January 20, 2016)(available at http://www.dol.gov/whd/flsa/Joint_Employment_AI.htm).
14
4826-5264-3120.1
most relevant to franchisors, the DOL suggests that a joint
employment relationship may exist where the putative joint
employer handles payroll or performs other employer functions,
sets hours or schedules, or is involved in the hiring or supervision
of the employee.
Although beyond the scope of this article, the DOL’s new Administrator’s Interpretation
has potentially far-reaching implications for franchisors under federal law.
D. Key Takeaways from Recent Decisions and Legislation
The recent decisions by the NLRB concerning joint-employer liability provide little in the
way of concrete guidance to franchisors seeking to structure their franchise relationships so as to
comply with the NLRB’s advice and avoid potential joint liability. The cases are largely fact
specific and may depend, whether rightly or wrongly, on the scope of the violation at issue. Yet
there are a few key takeaways that these decisions offer that can provide guidance to franchisors
going forward.
The facts in Browning-Ferris – including the setting of wages and the constant oversight
of performance -- appear to give rise to a much more obvious relationship of control than might
be seen in a typical franchisor/franchisee relationship. What is problematic about the decision,
however, is that it establishes a quite broad “indirect” or “theoretical” control test that may
subsume franchise relationships even on a much lesser factual record. The NLRB General
Counsel himself suggested in his comments to the franchise community that there are various
practices by franchisors which may fall within the expanded Browning-Ferris test, citing
specifically:
•
the franchisor’s ownership or control of the real estate where licensees operate,
which could allow them to control access to union organizers;
•
use of recent technology that allows franchisors to monitor franchisee employees’
performance;
•
requiring franchisees to add the franchisor as another insured on employer
liability/workers’ comp policies. 55
In addition to these factors highlighted by the General Counsel, there are a series of other
key factors that the NLRB has repeatedly considered as important in establishing the requisite
level of control, including whether the franchisor:
•
55
retains the authority to hire, fire, and discipline franchisees’ employees;
See Spandorf, at 2.
15
4826-5264-3120.1
•
retains the authority or capability to supervise and/or control its franchisees’
employees work schedules and/or conditions;
•
maintains employment records of its franchisees’ employees;
•
retains the authority to determine the rate and method of its franchisees’
employees’ compensation;
•
retains any ownership interest in the franchisees’ equipment and/or facilities;
•
retains the right to assign tasks, directions and/or instructions to its franchisees’
employees; and,
•
retains the authority to promulgate work rules to the franchisees’ employees.
In addition to these key areas, the NLRB has also repeatedly focused on the clear and
express ability for the franchisee to reject the employment-related suggestions by the franchisor,
giving the franchisee the ultimate discretion over day to day employment decisions – for
example, the policy of non-interference that Freshii exercised with respect to human resources
decisions, or the ability of the Green JobWorks staffing agency to provide higher wages than
those suggested by ACECO.
So far, so good. But the difficulty lies in those areas where the franchisor’s system and
operational standards could be said to “influence” the franchisee’s relationships with its
employees, such that the franchisee may change its standards or make labor decisions based on
the indirect control asserted by the franchisor. For example, the NLRB found relevant that BFI
exercised control over the “the processes that shape” the day-to-day work of Leadpoint’s
employees’ productivity standards -- an idea which could easily be likened to the directions
provided in standard franchising operation manuals regarding employee standards and
performance.
In the sections below, we highlight certain areas of franchise business operations that
may be affected by new concerns of joint employ liability and provide suggestions for how
franchisors might avoid the appearance of indirect control.
E. Protecting the Normal Course of Franchise Business Situations From Possible
Joint Employment Implications
Franchisors operating in the post-Browning world must achieve a careful balance
between engaging in the continued practice of establishing brand standards and providing
operational guidance to maintain the brand (as required by the Lanham Act) and avoiding the
appearance of direct or indirect control over a franchisee’s relationship with its employees. It
can be helpful to think of this balance by dividing the world of franchise operations into two
categories. The first are those operational instructions that affect the consumer’s experience of
the franchisor’s brand – for example, uniforms, quality standards, and store opening and closing
16
4826-5264-3120.1
hours. The second are those areas that do not directly impact any “deliverable” with which the
franchisee’s consumers will interact – for example, background checks, drug and alcohol
policies, and employee wages. With regard to the second category, the franchisor should be
cognizant of not directly expressing preferences or directions and permitting the franchisee a
significant level of discretion as to decision-making and implementation.
At a minimum, the franchise agreement should explicitly state that the franchisee is
responsible for all employment decisions. Yet a franchisor should also seek to eliminate all
unnecessary controls on employee qualifications – that is, controls that are not needed in order to
protect or enhance the franchisor’s brand or the system as a whole. While the inquiry will also
be fact specific, we provide some specific examples below.
1. Employment policies, forms, and process
Franchisors sometimes provide model or template employment policies for franchisee
consideration and adoption. Policies included in a typical employee manual or handbook govern
employee conduct, discipline, at-will status, employer expectations, benefits, routine personnel
matters, and other topics not directly connected to protecting the brand or the franchisor’s
system. Providing employment policies makes sense to many franchisors as a means to help
franchisees have clearly communicated policies and a sound footing for employee relations.
Indeed, part of running a good shop is having well-articulated and lawful employment policies.
Franchisees recognize the value provided by a franchisor in providing this kind of help.
Franchisors must understand, however, that even with bold disclaimers stating that the
polices are optional and that franchisees must obtain their own legal review to ensure state law
compliance, providing employment policies will place a checkmark in the joint employment
column. It’s one of those practices a plaintiff’s lawyer will be happy to see when opposing the
franchisor’s motion for summary judgment on joint employment. But absent exacerbating
evidence (e.g., forcing the adoption of specific employment policies or auditing franchisees’
policies to ensure consistency with the franchisor model policies), this will not in the final
balance tip the scales significantly toward joint employment in an otherwise typical franchise
arrangement. Franchisors should not, however, put their logo or name on any template policies
provided to the franchisee.
Dictating or even suggesting the use of specific forms or processes relating to hiring,
discipline, performance evaluation, or termination certainly creates risk. On the one hand, like
template employment policies, a franchisor can defend the use of template forms as the provision
of optional tools for the franchisee’s use. But this slope gets slippery fast. A suggested
performance evaluation form or tool suggests that the franchisor is encouraging the franchisee
not only to conduct employee evaluations but also what to consider in evaluating performance.
A template employment application may create an inference that the franchisor impacts what
information and hiring criteria franchisees consider. Certainly, the more a franchisor does in this
17
4826-5264-3120.1
arena, the more the appearance will emerge of involvement in the franchisee’s employment
decisions.
2. Insurer and vendor selection
A franchisor does not impact the essential terms and conditions of employment by
franchisees by arranging for provision of employment practices liability, workers compensation,
or other insurance to franchisees by one or more national providers. Franchisors should avoid
forcing franchisees to maintain any particular kind or level of employment-related insurance –
especially where doing so directly translates into benefits for franchisee employees (e.g.,
requiring short-term disability insurance). But a franchisor utilizing its leverage to bring
potential customers to the door of an insurer or vendor for the benefit of franchisees who make
the decisions about whether, what kind, and how much to purchase, seems like a low risk
proposition.
3. Employment data collection; performance monitoring and scheduling tools
Franchisors risk the appearance of joint employment if they collect data about
employment at the franchisee level. Regulators and courts will view with suspicion franchisor
possession of data about hours, staffing, and labor costs. Obtaining such data begs an obvious
question: why does the franchisor want this information if not to use it to impact or even control
franchisee staffing levels or compensation? The same question arises from any monitoring of
employee performance. Monitoring employee performance suggests a reasonably probability
that the franchisor has touched the proverbial third rail of joint employment – involvement in
how the franchisee employees do their jobs. In some joint employment lawsuits, a plaintiff’s
ability to plead in a complaint that a franchisor monitors franchisee job performance has
contributed to the court’s denial of the franchisors’ motions to dismiss the case.
Even tangential involvement in the scheduling of employees will heighten the risk of a
joint employment finding. An employer determines when and how often employees work. If a
franchisor provides advice or analysis that drives franchisee scheduling decisions, then the
franchisor looks like it plays a role in determining schedules and staffing levels. In reality,
merely providing data to franchisees about average or optimal staffing levels, with no suggestion
that conformance must follow, should not evidence joint employment. Providing information
and analysis is not control when a franchisor maintains complete autonomy to make changes
based upon the information. In litigation or regulatory actions, however, when phrases such as
“indirect control” and “economic realities” govern outcome, franchisors need to exercise extra
caution when swimming in these waters.
18
4826-5264-3120.1
4. Franchisee regulatory and legal compliance
An ironic tension exists between a franchisor’s legitimate interest in franchisee legal
compliance and the heightened joint employment risk that comes with getting too involved in
franchisee legal compliance. If franchisees comply with employment and labor and other
applicable laws, franchisors don’t get pulled into legal actions resulting from non-compliance
and the brand avoids association with the attendant bad publicity. Yet, franchisor involvement in
franchisee compliance can be deemed a joint employment indicator.
One possibly useful distinction here is between requiring/monitoring legal compliance
and controlling the manner of compliance. For example, supplying template Fair Labor
Standards Act policies about exempt and non-exempt status and the making of improper
deductions from salary; auditing the payment of overtime to non-exempt employees; and
providing other tools for compliance with the FLSA should not be an indicator of joint
employment. The franchisor does no more than make sure the franchisee is following the law.
The franchisor does not tell the franchisee what wages to pay for non-overtime work or whether
to schedule employees for overtime versus hiring more employees to avoid overtime. On the
other hand, if the franchisor directs the franchisee to hire more workers to avoid overtime hours
or to reclassify from exempt to non-exempt, then the franchisor impacts the wages or other terms
and conditions of employment.
As the courts decide more joint employment cases, the issue of franchisor involvement in
legal compliance should become clearer. In the interim, best practices for franchisors include, in
addition leaving the method of compliance to franchisee discretion, documenting franchisor
advice to franchisees to seek their own legal advice; staying out of any decisions about how to
compensate or otherwise treat any individual employee; and making the use of any forms,
methods, or processes that involve hiring or compensation clearly optional.
5. Ordinary course of business communication (newsletters, advisories,
and best practice updates)
Generally speaking, a franchisor’s regular business communications with franchisees
should be critically reviewed to eliminate language that reads like “top down” control over
employment-related policies. Franchisors should avoid expressing “best practices” in a way that
sound like workplace rules -- for example, rather than stating that “no employee dressed in
improper attire may interact with customers”), a franchisor should emphasize the brand
justifications for particular employee attire. Franchisors should also avoid communicating
threats to terminate a franchisee for failing to implement the “best practices” suggested by the
brand with respect to non-customer facing labor-related directives.
19
4826-5264-3120.1
To the extent that ordinary business communications to franchisees are provided online
(for example, through an intranet hosted by the franchisor and which franchisees access),
franchisors should be careful not to allow such online repositories to become a graveyard of
outdated material – including old materials that may not comply with the current paradigm for
considering the joint employer relationship. Such old materials, even if no longer utilized, may
raise issues if made discoverable in the course of litigation over the joint employment issue.
6. Operational software and other tools
Franchisors should review operational software and other tools, such as manuals, IT
systems, or otherwise, to reduce the risk of excessive controls leading to a joint employer
determination. While it is acceptable to require that all franchisees utilize a uniform POS system
for collecting and reporting sales data to a franchisor, some POS systems are bundled with
software features that help franchisees manage their workforces and which include mandatory
wage rates, staff scheduling features, and other employment indicia. In general, such software
components should be carefully scrutinized with the assistance of a franchise lawyer and
elimination of unnecessary components should be considered. If a franchisor cannot unbundle
the software or believes such controls are significant to the brand, then a franchisor should be
careful to integrate carefully and strongly worded language indicating that these are suggestions
rather than mandatory requirements.
7. Training franchisee personnel
Franchisors will likely need to retain some measure of control over training of its
franchisees’ employees. Franchisors should be aware, however, that even where such training is
farmed out to a third-party development manager, they may still be considered liable for any
improper practices that cross the line of direct/indirect control.
When it comes to training franchisees with regard to employment laws, it is especially
advisable not to dictate what employment policies or practices a franchisee should follow.
Rather, it is preferable to recommend a third-party service provider to the franchisee, such as a
qualified labor relations/human resources consultant or a third party provider of payroll or other
outsourced employer functions, who can provide the franchisee with the necessary training and
resources. Even in these instances, franchisors should not insist that the franchisee utilize a
particular training provider unless there is a bona fide reason related to the protection of the
franchisor’s brand for requiring the provider.
8. Establishing franchise employee qualification requirements
A franchisor should have no involvement during its franchisees’ recruiting, interviewing
and hiring process in order to avoid the perception that the franchisor exercises control over
screening or hiring decisions. It also is advisable for a franchisor to refrain from mandating the
20
4826-5264-3120.1
forms a franchisee uses in connection with employment decisions (e.g., employee applications or
other employee forms to use in determining whether potential employees are qualified), as
opposed to simply providing sample forms which the franchisee may or may not choose to use.
To the extent the franchisor wishes to provide sample forms, such forms should be clearly
demarcated as optional samples and it should be made clear that the franchisee is responsible for
developing and selecting the forms to be used in obtaining applications, screening and hiring
employees.
9. Auditing or inspecting franchisee records or locations
Conducting reviews and inspections of franchisee operations is generally acceptable so
long as such reviews and inspections are conducted in connection with protecting brand
standards, which, of course, is usually the case. However, if a franchisor’s inspector observes
activities that violate brand standards, the best course of action is to notify the franchisee of the
inspection results and let the franchisee implement and supervise corrections. A franchisor’s
field team should not direct the franchisee’s employees on-the-job to make such corrections.
Checklists used by the field team should be focused on the “deliverables” (as discussed above)
that directly impact the customer experience.
Franchisor personnel who conduct on-site visits should never consult with the
franchisee’s employees as it relates to the terms and conditions of their employment. And, when
a franchisor’s field team members interact with franchisees and the franchisees’ staff, it is in a
franchisor’s interest to ensure that the field team members’ communication style and attitude is
consistent with the brand message and that they avoid body language during audits or inspections
that would be perceived as “top-down” or “supervisory” in nature. Unless there are issues
observed that pose an immediate danger to the health or safety of the public, it is typically
advisable for the field team to observe silently and then issue a written report to the franchisee
summarizing the visit. A franchisor should make clear that the franchisor’s reviews and
inspections of operations do not substitute for the franchisee’s own duty to supervise their own
operations and workers.
When auditing franchisee records, it may be advisable for a franchisor to look for, and
insist upon, a clearer separation or delineation between the franchisor and the franchisee in
certain of the franchisee’s contracts. For example, in regard to Certificates of Insurance that the
franchisee obtains from its insurers, the franchisor may wish to insist on a requirement that the
franchisee obtain a separate endorsement of the franchisor, rather than simply having the
franchisor listed as an “Additional Insured.” Under no circumstance, should a franchisor review
or opine upon a franchisee’s employment records.
21
4826-5264-3120.1
III. CONCLUSION
The Browning-Ferris decision has rocked the franchise world and created much concern
about its potential to fundamentally alter the franchisor-franchisee relationship. It is certainly
true that the NLRB has been unclear in its guidance and has suggested the potential to sweep
significant portions of the typical franchisor brand control standards under the rug of joint
employer liability. Franchisors must be careful and cognizant of these decisions. Yet there is a
more optimistic view of the future landscape for franchisor-franchisee relations. If the Freshii
decision is any guide, it is unlikely that the NLRB will seek to unravel entirely the ability for
franchisors provide operational guidance to their franchisees, in particular in areas such as
employee training where franchisees and other small business owners rely heavily on the
expertise that a franchisor can provide. Instead, the NLRB appears more concerned with
improper attempts to influence collective-bargaining actions and with undue influence on the
franchisees’ day-to-day employment related decisions. One possible way to avoid the quagmire
is for the franchisor to focus specifically on those brand standards that are truly necessary for the
external consumer experience, and to approach internal-facing employee standards by issuing
recommendations that permit for a significant level of franchisee discretion. With some careful
attention to this distinction, franchisors can maintain their brand controls and fulfill their Lanham
Act obligations while avoiding the specter of joint employer liability.
22
4826-5264-3120.1