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California Franchise Law Increasingly Unsettled

If you are either a franchisor or a franchisee in California, you can hardly be blamed for feeling disoriented. There is a lot going on, competing moves in different directions at different levels of government that may fundamentally redefine the franchisor/franchisee relationship.  And this is just part of larger seismic changes in the nature of employment relationships.

When is a franchisor legally responsible for something that a franchisee does?  The short version of the answer is that it depends on the amount of control the franchisor exercises over the franchisee’s actions. The greater the control, the greater the likelihood of legal liability.

The long version is that the franchisor’s actions may matter as much as the terms of the franchise agreement, the threshold of control necessary to establish liability may be dropping, and the political climate may be shifting toward greater protections for employees against the actions of employers and for franchisees against the actions of franchisors. Here are four developments to watch.

The California Supreme Court’s Decision in Patterson v. Domino’s Pizza, LLC

In a case that left everyone with whiplash, the trial court first granted Domino’s motion to dismiss a case in which an employee alleged that the franchisor exercised enough control over the workplace to share liability for sexual harassment by a coworker. That much was expected.

Then the Court of Appeals reversed, holding that there was enough evidence of control to go to a jury trial. This caused tremendous concern because the agreement between Domino’s and the franchisee contained provisions frequently found in franchise agreements. The Court also took note of oral statements made by the franchisor’s representatives to the franchisee about needing to “get rid of” the offending employee. The outcry among franchisors was immediate. It looked like open season on franchisors. What plaintiff’s lawyer would not prefer to be able to sue the party with the deep pockets?

On August 28, 2014, the California Supreme Court reversed the Court of Appeals, reinstating the trial court’s decision. However, the Supreme Court seemed to leave the door open for future lawsuits of the same kind by noting that a franchisor might be liable if it retained the right of general control over the day-to-day operations of its franchisees.

California SB 610

In the meantime, the California legislature passed SB 610, which would fundamentally change the relationship between franchisors and franchisees, permitting, for example, franchisees to sell the franchises more freely. Some have speculated that this might make it easier for fast-food workers to unionize because they might be able to negotiate directly with the franchisee. If this bill, yet unsigned by the governor, is seen as a move toward greater franchisee autonomy that would seem to militate against the expansion of franchisor liability. If however, it is seen as a move that devolves power down through the corporate structure and perhaps ultimately to the employee, then it might be part of a trend to impose greater liability on the franchisor. This could go either way or nowhere.

The NLRB’s Decision to Treat a Franchisor as a Joint Employer

In July, 2014, the National Labor Relations Board’s General Counsel decided to name a franchisor as a joint employer in an unfair labor practices case. This is a departure from current practice. The rationale behind the decision is that even when the franchisee exercises immediate control of hiring, firing and other employment matters, those decisions are affected by policy matters within the control of the franchisor. It views the franchisor/franchisee relationship as an integrated rather than a divided system.

The position taken by the General Counsel’s office is that an entity may be a joint employer even

  • when it exercises only indirect control over significant terms and conditions of employment, or
  • where it possesses the potential power to control such terms and conditions of employment or
  • where ‘industrial realities’ otherwise made it an essential party to meaningful collective bargaining.

Given this standard, it is hard to imagine a situation in which a franchisor would not be liable for employment actions taken by the franchisee. The General Counsel’s position is a theory of litigation, not a rule, and must still be tested in the courts.

DOL Renews Scrutiny of Franchising

All this is occurring against a background of greater US Department Of Labor Wage and Hour Division scrutiny of franchise operations in general. In the DOL’s 2010 report “Improving Workplace Conditions Through Strategic Enforcement,” David Weil, the Principal Investigator, since confirmed as the Wage and Hour Administrator, noted particularly the role of franchising in the “fissuring or splintering of employment.” The report suggests that this contributes to a situation that may increase the incentives for employers to violate labor and employment law with respect to low wage workers.

The ultimate suggestion is that enforcement action be targeted toward some areas in which franchising is common practice, such as the fast-food industry, hotel and motel operation, janitorial and home health care services.

The Franchisor’s Best Resort

Taken together, these are unsettling trends for franchisors and franchisees. The franchisor’s best resort is still a well-drafted franchise agreement and a comprehensive operations manual that clearly delineates roles and responsibilities. Franchisors’ representatives should be very careful to deal only with the franchisee or designated manager, and not directly with employees.  The franchisor should also realize that direct operational assistance may open the door to liability.  Even these steps may not be sufficient, however.

Franchising is certainly a major driver of the economy and an important resource for the entrepreneur. The issue of franchisor liability seems to be increasingly unsettled against a background of changing employment relationships. The growth of part-time, on-call, temporary, perma–temp, and independent contractor relationships, working from home or so called “homing from work” makes the concept of “employment” seem not to be what it once was. Labor and employment law seem like odd, ill-fitting rules left over from some other century.

Feeling confused?  At least you’re not alone. Clearly drafted agreements and careful management  seems like the best recourse for the moment.

Nasir Pasha, Esq.

Post by:

Managing attorney and co-host of podcast Legally Sound | Smart Business

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