Know the Joint Employer Risks Where You Operate
Key developments in joint employer liability in countries around the globe.
By Will Woods, CFE, and Emily Harbison
In recent years, joint employer liability has emerged as a persistent threat for companies who use franchise business models. Franchisors are increasingly facing claims brought by employees of franchisees for entitlements flowing from their employment. The outcome in these cases is unpredictable because the law is undergoing change. As such, the joint employer aspects of franchising arrangements can prove to be a minefield for the unwary and are a growing global concern.
"Franchisors are increasingly facing claims brought by employees of franchisees."
It has never been more necessary for franchisors to take proactive steps to assess joint employment risk, including a detailed examination of their business operations as well as their contractual arrangements with franchisees. Being proactive enables the franchisor to make any necessary adjustments to its working relationships and the terms of its contracts with franchisees and provides the ability to mitigate risks through insurance or indemnification clauses.
The recent Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 was enacted in response to media coverage regarding the exploitation of vulnerable workers in large franchise systems and introduced potential liability for franchisors for their franchisees’ breaches of Australian workplace laws.
The new legislation imposes liability on a "Responsible Franchisor Entity" if it knew or could reasonably be expected to have known that the contravention of employment laws by the franchisee would occur, or that a contravention by the franchisee “of the same or a similar character” was likely to occur. To be a "Responsible Franchisor Entity": (1) there must be a "franchise" relationship, which is broadly defined; and (2) the "franchisor" must have a significant degree of influence/control over the franchisee entity's affairs.
A franchisor will not be liable if it had taken "reasonable steps" to prevent its franchisee’s contravention of employment laws. A court may consider the following factors in determining whether “reasonable steps” were used: the size and resources of the franchisor, any action taken to ensure the franchisee had a reasonable knowledge and understanding of the legal requirements, the franchisor's arrangements for assessing the franchisee's compliance, and the extent to which the franchisor's arrangements with the franchisee encouraged compliance with workplace laws.
Guidance from the Fair Work Ombudsman suggests it will expect certain franchisors to take a proactive approach (e.g., providing compliance training for franchisees and conducting compliance audits). Franchisors in Australia will now need to be more vigilant in monitoring the compliance of franchisees with the workplace laws and will need to be prepared to take action if contraventions occur. They should also consider updating their franchise agreements to require strict compliance with workplace laws and indemnification by the franchisee.
Early in 2018, the Ontario government made it easier to establish that a franchisor is a “related employer” under the Employment Standards Act, 2000 ("ESA"). The amendment may be short-lived due to a recent change in government but, at present, separate legal entities may be treated as one employer if they simply carry on related business activities. Previously, separate entities were only treated as one employer if they had also acted in a manner that had the intent/effect of defeating the purpose of the legislation. This simplified standard allows employees to file ESA complaints against the franchisor, the franchisee or both and may expand the Ministry of Labour’s jurisdiction to inspect franchisors, and to engage directly with franchisors on enforcement initiatives under the ESA, even when they are not operating company-owned units in Ontario.
Additionally, recent British Columbia Human Rights Tribunal decisions demonstrate that franchisors who exercise control over their franchisees may be liable for their franchisee’s breach of human rights legislation. For example, in United Steelworkers v. Tim Hortons, the Tribunal considered the following as being indicia of control: a rigorous compliance program, particularly regarding employment standards; the presence of an internal grievance process linking individual employees to company headquarters; and a history of franchisor-led employment-related investigations.
In Mexico, franchisors may be jointly liable for the legal entitlements of their franchisees' employees including statutory severance, wages, accrued benefits, overtime pay and other entitlements. In addition, under the Mexican Federal Labor Law, two or more companies may be jointly liable for the labor and social security obligations owing to an employee, including severance.
Exercising strict control and supervision over franchisees will increase the franchisor's risk exposure in joint liability claims. Where a franchisee's employees file a labor claim against the franchisor, or both the franchisor and franchisee, they will typically allege that they were performing activities under the franchisor's supervision or guidance and/or that the franchisor benefited from their services. To help mitigate against the risks of joint or direct liability, all employment documents should refer to the franchisee only.
Franchisors should take particular care when facing labor claims. In Mexico, any company that is named as a defendant in a labor claim is required to file its own defense. As such, even when the franchisee is named as a co-defendant and voluntarily takes the position that it is the plaintiff's only employer, the franchisor's failure to actively defend itself would likely result in an order against the franchisor.
"Internationally, franchisors must navigate significant country-specific regulations."
It has become increasingly important for franchisors to review and confirm that they have appropriate indemnities and warranties from their franchisees and that their franchisees are well-established entities, so that any contractual protections are backed by assets of substance.
Internationally, franchisors must navigate significant country-specific regulations. Many countries have specific legislation governing franchise agreements that may affect presumptions of joint liability. Developing a coordinated global approach to franchise expansion that accounts for local compliance is essential to business success in this area.
Will Woods, CFE, is Partner in Baker McKenzie’s office in Dallas, Texas. Emily Harbison, who specializes in labor and employment law, is Partner at the company’s office in Houston. Find out more at franchise.org/baker-mckenzie-supplier.