5 Ways to Address the Legal Risks of Joint Employment

How will the franchising world change under Donald Trump's administration?
How will the franchising world change under Donald Trump's administration?
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In recent years, the franchise world has been upended by an aggressive, anti-franchise, NLRB. 2014 saw the National Labor Relations Board (NLRB) issue a series of rulings that held that franchisors might be the joint employers of their franchisees' employees. A franchise is a trademark license that extends use of a brand while shifting costs of overhead such as labor to an independent contractor.

The idea that the employees of a franchise may also be the employees of the franchisor defeats the purpose and value of the franchise as a trademark license. For decades before these rulings, franchisors included support of employment practices in their franchise systems, the same way they included food safety and operational support.

It makes sense because franchisees need the support and training in all areas of their business, not just some. Joint employer issues were not a problem because franchisors knew and understood that they give the franchisee tools, and it is up to the franchisee to implement them. Chances were that if the franchisee was doing a poor job of employee recruitment and training, then they were probably doing a poor job in other areas; hence, the brand would be damaged. 

The previous rule that franchisors could be held liable as a joint employer only if it exerted actual control of the franchisee’s employees served the industry well, and it allowed the franchisor to share its extensive resources on employee management with franchisees. 

Now, however, franchisors are not sure what to do. I hope that the new Administration will return to the previous standard so that franchisors can return to helping their franchisee be successful in the employment management side of their business—the way it should be. However, until then, franchisors must exercise caution in how it supports its franchisees on the labor front.  

Here are five ways a franchisor may address and minimize the legal risks of joint employment liability (with some commentary included):  

1. A franchisor should not be involved in the franchisee's decision-making process

Because these areas are the focus of joint employer legal risk, a franchisor must distant itself from a franchisee's important and necessary employment decisions, such as hiring, firing, and disciplining employees; as well as establishing wage levels and work conditions. This is pretty much the same as the pre-radical NLRB. Good franchisors have never taken on these roles, and it has been a rule from the beginning of franchising that the franchisee makes the ultimate decisions on its employees.

However, unlike the forgoing, franchisors are now being advised not to provide franchisees with employee applications or other employee forms. I still believe this is a gray area, and I tell franchisors that they can provide forms so long as they are carefully crafted and not franchisee-specific. 

Related to this, and another pre-radical NLRB good practice is that the franchisor should not screen or approve a franchisee's hiring decisions, even if it is an important management hire. Workers should clearly know that they have only boss, the franchisee.

2. A franchisor should not be involved in the franchisee's process of training franchise employees

Perhaps one of the most significant casualties of the current NLRB rules is that important aspect of franchise employee training. Franchisee employee-customer presentation is as important to a franchise system as the look and taste of a restaurant’s food. The thought that a franchisor cannot create branding around employee behavior is anathema to the idea of consistent delivery of products or services; hence, another reason why we need to old law back. 

However, here is the current advice to franchisors: franchisors should isolate themselves from the employee training process as much as possible. Franchisees should be left to choose whether to use franchisor-run training programs for workers below the senior-management level.

Train-the-trainer programs should be utilized so that franchise employees who complete a training program are qualified to teach others all newly learned skills. Franchisors should limit employee training to subjects that may be directly connected to the implementation of franchise and brand standards. Franchisors should not demand that employees complete remedial training. Breach of the franchise agreement should motivate franchisees not to hire unqualified persons or assign the untrained to work ahead of schedule.

3. A franchisor should not supply franchisees with a sample employee handbook

Another important casualty of the current rules is the all-important employee handbook. Again, like food recipes or massage techniques and oil change methods, sample employee handbooks should be an important resource for franchisors to supply to their franchisees. But not in today’s environment. Now, here is what franchisors are being told: Instead of supplying franchisees with a sample employee handbook, franchisors should recommend that franchisees retain the services of a suitably qualified labor relations/human resources firm that offers payroll and other administrative functions. While it is acceptable to recommend a specific service provider, a franchisor shouldn't limit a franchisee's options or make it mandatory that a franchisee use a particular service provider. If a franchisor wants to offer centralized payroll, administrative, or accounting services to franchisees, it should offer them as optional programs.

This is an area where I tell my clients they may want to take some risk. First of all, an integrated accounting system, tied into the franchisor’s centralized system is critical for accountability and measurement purposes; it has nothing to do with employee practices. Good policies, tied to the protection of the brand, are critical to the system, and so long as you are not making the final decisions on employment for the franchisee, then you should give them the resources to succeed.  I often tell my clients that at the end of the day, you have to do what is best for your business—which it ultimately best for their employees. However, in today’s wacky political environment, what makes common sense may pose legal risks.

4. A franchisor should not make the use of certain software applications mandatory

Who knew that advanced technology would be the noose that strangled an entire industry. While other industries thrive with the advancement of technological resource, the government is using it as a poisoned dart in franchising. For now, while it is an acceptable practice for franchisors to require franchisees to use specific software applications such as point-of-sale applications to collect and report sales and other performance data in real time, the NLRB has specifically cited labor scheduling technology as evidence of a franchisor’s involvement in a franchisee’s duties as an employer, even if the use of the labor scheduling features is optional. Again, these are resources, which benefit the franchisee and the brand. 

We are now having to tell our clients that if franchisors require franchisees to use particular software which includes other applications to manage their labor force, the additional applications that perform labor functions should be disabled, although the franchisee may be given the option to voluntarily elect to use them.

5. A franchisor should not express brand standards as workplace rules in written materials

Last, and perhaps the most frustrating, operating manuals, training materials, recruiting materials, and other communications may be sources of incriminating evidence in a joint employer case, as they often contain language that expresses operating standards in a tone that makes them sound like mandatory, workplace rules. Again, employees are an important part of any brand, and they should be trained to present a consistent message of the brand identity.  Employee standards should be high, and franchisees should see them just as important to the brand as the taste of the food.  Franchisees are having their legs cut out from under them by rules, which make no sense in the real world of franchising.

In conclusion, time will tell whether the NLRB continues to reshape the way franchisors are seen in the context of joint employment liability. This writer is hopeful that the new Administration will reverse course and return to a more common sense, pro-business approach. However, for now, a franchisor must carefully interact with a franchisee to avoid any risk of liability for a franchisee's actions related to its employees. Until the new Administration rules otherwise, it is essential that franchisors review and reassess all current policies and procedures related to the business of their franchisees to reduce the risk of joint employment liability. 

Perry McGuire, Esq. is with Smith, Gambrell & Russell, LLP ([email protected]). SGR is a full-service, international law firm that advises regional, national and global businesses on a wide range of legal matters. The firm’s 200 attorneys provide legal counsel in more than 45 specialized practice areas, including corporate transactions, litigation, intellectual property, aviation, banking, construction and employment law. Founded in 1893, SGR has offices in Atlanta, Austin, Jacksonville, New York, Washington, D.C. and Frankfurt, Germany.