For full-service restaurant franchisors, the time to act is now.

If you are a full-service restaurant franchisor, updating your Franchise Disclosure Document, Franchise Agreement, and other system documents is more important than ever. In recent decisions, the National Labor Relations Board and the Department of Labor have increasingly scrutinized franchise systems. These decisions threaten to hold franchisors—as the top level of the franchise system that establishes system standards and policies—responsible as an employer of its franchisees’ employees.

This is otherwise known as the joint employer doctrine, where employees may be considered to be employees of more than one employer—here, the franchisee and the franchisor—if both exert enough control over day-to-day operations and employment decisions.

The result could be devastating to full-service restaurant franchise systems, in that it could subject franchisors to the responsibilities and costs of being an employer.

These include franchisors’:

  • required compliance with additional regulatory requirements;

  • increased oversight and control over franchisees;

  • participation in collective bargaining efforts; and

  • possible liability for discrimination and harassment claims brought by its franchisees’ employees.

Although some states have enacted legislation providing that a franchisor will not generally be deemed an employer of its franchisees’ employees (including Tennessee, Texas, and Louisiana), even if a franchisor is located in one of these states, it remains at risk under federal law.

With this in mind, now is the time for full-service restaurant franchisors to update their Franchise Disclosure Document, Franchise Agreement, Operations Manual, and other system documents to avoid being deemed an employer of its franchisees’ employees. This can be accomplished while still maintaining the standards and uniformity that create a successful full-service restaurant brand.

Tips and Best Practices to Minimize Your Risk

While the determination of whether a franchisor is a joint employer is heavily based on the particular facts and circumstances, with no hard-and-fast rules or safe harbors, a few tips and best practices to minimize the risk are as follows:

  • Do not exert control over franchisees rising to the level of day-to-day supervision. Remove any unnecessary operational standards or restrictions that do not relate to brand protection, quality, and uniformity. Explicitly state that the franchisee is solely responsible for the independent management and operation of its business.

  • Eliminate any actual control or reference to control over a franchisee’s employment decisions, including hiring or pre-approval of employees, discipline or firing of employees, supervision or direction of employees, control over employees’ wages, benefits, hours, scheduling or appearance, or requiring a certain number of employees.

  • Avoid giving employment or HR advice to franchisees—including with respect to employees’ efforts to unionize—and avoid assisting in resolving employee complaints. Explicitly state that the franchisee is solely responsible for labor and employment matters and decisions related to its employees. If any employment guidelines are given, explicitly state that they are optional (rather than mandatory).

  • Do not require that franchisees use a particular software or process to manage and track employee scheduling, costs, records, and other data.

  • Be cautious in providing forms of employment applications, interview questions, employee handbooks, etc., to franchisees. If such materials are provided, specify that they are forms which may or may not be used in the franchisee’s discretion and require that franchisees place their legal entity name on all such materials if used. Explicitly state that the franchisee is responsible for informing its employees of the identity of their employer (the independent franchisee entity).

  • Avoid training a franchisee’s employees (other than top-level management) and avoid providing general training materials. Explicitly state that the franchisee is responsible for training its employees.

  • Allow occasional inspections, training, and other activities on the franchisee’s premises, but do not make regular visits or contact with the franchisee’s employees. Limit inspections to quality, uniformity, and brand compliance to the extent possible. Consider out-sourcing inspections and training to an independent third party or a franchisee association.

  • Specifically require the franchisee’s compliance with labor and employment laws, and cite specific laws, in the “compliance with laws” provisions. Require the franchisee to indemnify the franchisor for the franchisee’s and its employees’ failure to comply. Require that the franchisee obtain employment practices liability insurance coverage.

  • Explicitly state that the franchisee is an independent contractor, and that there is no employer-employee relationship between the franchisor and the franchisee, or between the franchisor and the franchisee’s employees.

Gain the Assurance That Your Franchise System Will Pass the Test

If you are a full-service restaurant franchisor and have not yet updated your Franchise Disclosure Document, Franchise Agreement, and other franchise system documents to address the possibility of being deemed an employer of your franchisees’ employees, now is the time to do so. 

The opinions of contributors are their own. Publication of their writing does not imply endorsement by FSR magazine or Journalistic Inc.

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