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Are Franchisors Employers?

Written by Ken Gaebler
Published: 7/17/2015

If franchisors are considered employers, the franchising model is in jeopardy. A high-stakes battle is underway in this heated debate.

It's an interesting question: is a franchisor like McDonalds or Dunkin Donuts considered the employer of every employee that works for its franchisees?

McDonalds Franchisor Employer-Employee Controversy

Photo Credit: Dan Holm / Shutterstock.com

At first blush, it seems obvious that when I walk into a Dunkin Donuts, those employees work for that store's owner, not for the parent company that sold the store owner a franchise.

The NLRB Begs to Differ

But many are arguing that the parent company is in fact a de facto employer, which means they might be liable for claims related to employment discrimination, wage payment, minimum wage violations, and a litany of employment-related laws and regulations.

In particular, the National Labor Relations Board (NLRB) has been targeting franchisors for franchisees' labor law violations. They've thrown accusations of unfair labor practices at a few big franchisors, saying they are "joint employers" with their franchisees and that they are violating employee rights.

With regards to McDonalds, the NLRB has written that: "Our investigation found that McDonald's, USA, LLC, through its franchise relationship and its use of tools, resources and technology, engages in sufficient control over its franchisees' operations, beyond protection of the brand, to make it a putative joint employer with its franchisees, sharing liability for violations of our Act."

Yikes! If you are sitting at McDonalds' headquarters (or any franchisor's headquarters) that's a scary accusation.

Franchisors Are Not Happy

Needless to say, the franchisors are not pleased with the NLRB's actions.

If a franchisor is considered an employer, they are likely to get embroiled in a ton of lawsuits since lawyers would prefer to sue deep-pocketed franchisors rather than franchisees.

Indeed, Papa John's recently had to pay $800,000 for labor wage theft in New York. This fine applied to an individual franchisee, but New York Attorney General Eric Schneiderman indicated he was likely to go after the parent corporation. That's new (and scary) territory for franchisors, who have always felt that they were not liable for the actions of their franchisees.

Not surprisingly, franchising industry lobbyists are hard at work, trying to get state legislatures and other regulators to clarify the issue -- in their favor, of course.

States generally want to create a franchising-friendly climate because franchises are big employers. So, the net result is that we are starting to see new state laws that protect franchisors.

A Win for Franchisors in Texas

Last week, for example, Texas amended its labor code to definitively say that franchisors are not employers per se.

The new Texas law does have an exception. If a state court finds that the franchisor manages or controls its franchisee or its franchisee's employees in a way that is not typical of how franchisors normally operate, then the franchisor might be deemed to be an employer.

The idea is that franchisors can provide direction that is aimed at protecting their trademarks and brand. But going beyond that, micro-managing franchisees and their employees, puts a franchisor into dangerous territory in which they are at risk of being classified as employers.

Key Takeaways for Franchisees

If you are a franchisee, make sure you fully understand what constitutes an employer-employee relationship. In addition, consult with an expert to ensure you are complying with all of your employer obligations.

If you are a prospective franchisee looking at franchise opportunities, be aware that these legal battles are underway. If franchisors are ultimately found to be employers, they will likely pass on additional costs to you. They may also ask you to indemnify them for any labor-related liabilities that arise from your franchise operation.

Key Takeaways for Franchisors

This is an issue that going to evolve over time. As issues like income disparity and minimum wages are debated nationally, there's going to be a lot of attention on organizational structures that effectively push the employer liabilities downstream. Lots of folks are going to be saying that these legal and organizational constructs are designed to circumvent the labor laws.

At the franchisee level, the parent franchisor must absolutely steer clear of getting involved with defining work hours, hiring people, firing people, determining wage levels, and any hands-on supervisory activities.

The bottomline is that a franchisor should not be involved with the minutiae of running a franchisee's operations. If you are a franchisor and you truly have an arms-length relationship with franchisees, you're likely not at risk.

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