By now, the franchise community has heard that the franchise business model is under attack, particularly with regard to labor and employment issues. In December 2014, the National Labor Relations Board issued thirteen complaints against McDonald’s franchisees and their franchisor, alleging that McDonald’s USA is a “joint employer” of the franchisees’ employees. David Weil, the federal Department of Labor Wage and Hour Administrator, has openly claimed for years that the franchise model creates “fissured” employment relationships that incentivize employers at lower levels (meaning franchisees) to violate the FLSA and other rights of low-wage employees. It is widely believed that a good portion of the DOL’s enforcement resources will be spent under Administrator Weil’s watch on the matter of establishing franchisor status as “joint employers.”
There is valid reason to be concerned regarding these threats, and every effort should be made to combat them on a state and federal level, through lobbying, educating the public about the value franchising has in our economy and other measures. But franchisors and franchisees should also be looking internally to control the risk each of them have individually, and more broadly, to control the risk to the franchise business model itself.
Most of these issues will boil down to traditional employment law concepts and tests. Therefore, it is important that franchisors and franchisees understand common mistakes that can make it appear that “joint employment” exists.
Franchisor do’s and don’ts
- DO require that franchisees identify themselves to employees and others as an independently owned and operated franchise business.
- DO evaluate the wage and hour and employment practices of any franchise business that you take over and operate, to make sure you halt any unlawful practices that have occurred in the past and do not adopt them for yourself.
- DO limit your control and any professions of your control issued in writing in any way (franchise agreement, operations manual, email communications, website pronouncements, etc.). You want to make clear to any and all that you do not make employment-related decisions and/or any decisions regarding the franchisee’s day-to-day operations.
- DO educate your internal employees on how to communicate with franchisees, employees of franchisees and the public regarding your franchise relationship with franchisees and the lack of any employment relationship between the franchisor and any employee of any franchisee.
- DO NOT require your franchisees to secure your approval and review of their employee handbook.
- DO NOT advise employees of a franchise you must take over that “nothing will change.” If you do so, you’re adopting any existing unlawful practices of your franchisee as your own.
- DO NOT tell your franchisees how to pay their employees, or make other employment decisions for them.
- DO NOT advise franchisees to use questionable wage and hour practices to save money.
- DO NOT allow franchisees to write payroll or other checks using only the franchise brand name. Franchisees must use the name of their own business entity on all employment documents and payroll checks. Employees should understand the identity of their employer. It is most helpful if that reality is communicated to them in writing.
- DO NOT require that franchisees consult you before making hiring and termination decisions.
- DO NOT get involved in employment or workplace harassment investigations related to franchisee employees, and never tell an employee of a franchisee that you will resolve an employment-related problem for him or her.
- DO NOT allow franchisees to lead their employees to believe that you as the franchisor are their employer, nor that you have any employment relationship whatsoever with them.
Franchisee do’s and don’ts
- DO engage the services of a competent and experienced lawyer to advise you regarding your wage, hour and other employment-related issues.
- DO understand your obligations under federal, state and local law to your employees.
- DO ensure all your employees understand they are employed by your company, not your franchisor.
- DO make sure your employees’ paychecks are written from an account that clearly bears your company name, NOT that of the franchisor.
- DO adopt your own policies and procedures, and employee handbook.
- DO make sure your application forms, hiring documents, handbooks, policies, disciplinary forms, termination documents, unemployment responses and all other employment documents use your company name, NOT that of the franchisor.
- DO NOT merely adopt any sample forms or sample employee handbooks without amending them to suit your own specific business and without putting your own company name on them, rather than the name of the franchisor. DO NOT merely adopt the recommended wage and hour practices of your franchisor, including those that might be written in the operations manual.
- DO NOT blindly rely upon the practices of other franchisees in your area, or upon those of your competitors. Just because everyone’s doing it doesn’t mean it’s lawful.
Understanding, and following, these “do’s and don’ts” will help insulate your franchise system from the ever-growing risks of system-wide liability.
Michaelle L. Baumert is a partner with the law firm Husch Blackwell LLP where she advises companies, including franchisees and franchisors, on labor and employment law matters.
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