Joint Employer Rule Challenges Present Opportunity to Reinforce Roles, Responsibilities

Legal

Franchisors rightly impose requirements and system standards to assure uniformity in the franchise system and protect their trademarks.

By Brian B. Schnell

Franchising is facing external forces that could threaten the franchise business model. Those forces include the U.S. National Labor Relations Board’s efforts to deem franchisors joint employers of franchisees’ employees, an increasing number of vicarious liability related lawsuits, and other recent developments.

Franchisors and franchisees have vested and aligned interests in confronting these external forces. These forces also present opportunities for franchisors to reinforce and balance the roles and responsibilities of the franchisor, franchisee and system as a whole.

Franchisors rightly impose requirements and system standards to assure uniformity in the franchise system and protect their trademarks. Those fundamental requirements should not be twisted by regulators or courts to impose liability on the franchisor for wrongdoing by the franchisee or the franchisee’s employees.

Role of the Franchise Agreement and Ops Manual

To minimize this risk, the franchise agreement should expressly declare that any required standards exist to protect the franchisor’s interests in the system and the trademarks, and not for the purpose of establishing any control or duty to take control over those matters that are reserved for the franchisee. Your franchise agreement should reiterate within particular subject areas — such as employment, technology, training and elsewhere — that any particular standard is not intended to exercise control and that the franchisee is responsible for such control.

The franchisor’s operations manual should appropriately balance the roles and responsibilities of the franchisor and franchisee. The franchisor’s role is to protect, grow, and evolve the brand and system. The franchisee is responsible for day-to-day operations of the business. The operations manual reinforces the nature and scope of controls, as well as distinguishing the difference between required system standards and recommendations, guidelines and best practices to achieve those standards.

Understand the difference between mandating system standards versus unnecessarily mandating the manner and means of meeting the standards. It is often more appropriate to identify guidelines, recommendations or best practices to meet the standards. Do not let tradition keep you from making changes (i.e., “That’s not the way we’ve done it in the past.”).

Examples of franchise agreement provisions and operations manual language are included at the end of this article.

Role of Field Support

Your field staff should be passionate about helping your franchisees succeed and grow their businesses. But your field staff also should conduct itself with an understanding that each franchisee is an independent contractor who has control over its day-to-day operations, that the franchisee is not an agent of the franchisor, and that the franchisee acknowledges that it is ultimately responsible for all aspects of its business operations.

Make sure your field staff understands that it should not get involved in a franchisee’s HR-related matters. Staff should also understand the difference between training provided to a franchisee and the franchisee’s obligations to train its employees. Your field staff must know when its passion for helping franchisees could be distorted into excessive control of franchisees. Provide staff members with appropriate and ongoing training, guidelines and best practices to enable them to effectively fulfill the key roles they play. 

Make sure that the franchisee conspicuously identifies itself and its business as an independent franchise owner in all dealings with clients, customers, suppliers and others. This can include appropriate statements on signage at the business, your website, customer order forms and other related items. Also, encourage your franchisees to remind their employees, customers, lawmakers and communities that they are independently operated.

Franchisors can best manage their risk when franchisees operate independent businesses as part of a franchise system that has appropriate system standards to protect the brand. This begins with the franchise development process and initial training, as you reinforce the roles and responsibilities of the franchisor and franchisee. When done properly, franchisees are fully engaged, and you and your franchisees can focus on effective collaboration with customer-centric initiatives and activities that reinforce an undying devotion to the brand. Effective collaboration also fosters a willingness to embrace system change and other best practices that are necessary to drive unit-level economics and a franchise system’s sustainability.

Brian Schnell is a partner at Faegre Baker Daniels and heads the firm’s franchise practice. He can be reached at brian.schnell@faegrebd.com.

Example Franchise Agreement Provisions

Any required standards exist to protect our interests in the System and the Trademarks and not for the purpose of establishing any control or duty to take control over those matters that are reserved to you. The required standards generally will be set forth in the Operations Manual or other written materials. The Operations Manual also will include guidelines or recommendations in addition to required standards. In some instances, the required standards will include recommendations or guidelines to meet the required standards. You may follow the recommendations or guidelines or some other suitable alternative, provided you meet and comply with the required standards. In other instances, no suitable alternative may exist. In order to protect our interests in the System and Trademarks, we reserve the right to determine if you are meeting a required standard and whether an alternative is suitable to any recommendations or guidelines.

No employee of yours will be deemed to be an employee of ours for any purpose whatsoever, and nothing in any aspect of the System or the Trademarks in any way shifts any employee or employment-related responsibility from you to us. You alone are responsible for hiring, firing, training, setting hours for and supervising all employees.

It is the intention of the parties to this Agreement that we shall not be deemed a joint employer with you for any reason. If we incur any cost, loss of damage as a result of any actions or omissions of you or your employees, including any that relate to any party making a finding of any joint employer status, you will fully indemnify us for any such loss.

Example Operations Manual Language

General disclaimer on the first page of the manual: As a __________ franchisee, you alone are responsible not only for following the system, but also for the day-to-day operation of your individual Store. For example, only you are responsible for the control of your employees in the daily operation of the Store, as well as the safety and security of the Store, your employees, and customers. In this Operations Manual, we identify a number of recommendations or suggested practices related to various operational aspects of the Store, which we recommend that you implement at your Store. Our experience is that following the recommended or suggested practice will enhance the likelihood that you will be in compliance with system standards relating to the operation of your Store. We also in some instances outline required standards rather than recommendations or suggested practices. In those instances the required standards exist to protect our interests in the _____________ system and the ______________ trademarks and not for the purpose of establishing any control or duty to take control over those matters that are reserved to you.

As outlined in your Franchise Agreement with us, we have established a number of system standards that Store owners must meet. For example, one such system standard is the requirement that owners adhere to all laws related to the operation of the Store. This requirement to adhere to all applicable laws is a key system standard of the system. However, we do not establish specific “steps” or “controls” that an owner must take to meet this system standard. Rather, in this section, we identify a number of recommendations and suggested practices concerning compliance with laws. Please note that compliance with applicable laws and regulations deserves special attention because they clearly are your sole responsibility. We always recommend that you contact your own lawyer to make sure you understand and comply with all laws applicable to your business. No information that we provide to you in these areas shifts any part of this responsibility from you.