New Law Limits Franchisors’ Joint Employer Liability Exposure In Wisconsin

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In an environment where franchisors are increasingly concerned about being deemed “joint employers” with their franchisees, the Wisconsin Legislature has provided some welcome relief. It has enacted legislation that provides franchisors with assurances that they will not be treated as an “employer” of the employees of a franchisee for purposes of Wisconsin laws pertaining to unemployment insurance, worker’s compensation, employment discrimination, minimum wage and wage payments, merely because the franchisor retains rights of quality control under the parties’ franchise agreement.

2015 Wisconsin Act 203 adopts the definition of “franchisor” found in the Code of Federal Regulations. Such franchisors may still be treated as an employer of its franchisee’s employers in the following situations: (a) the franchisor has agreed in writing to assume that role; or (b) the franchisor has been found by the applicable department or division of state government to have exercised a degree of control over the franchisee or the franchisee’s employees that is not customarily exercised by a franchisor for the purposes of protecting the franchisor’s brand.

Recent rulings and policy initiatives of the National Labor Relations Board and U.S. Department of Labor have suggested that indirect rights to control another entity’s employees may be sufficient to support a finding that a joint employer relationship (i.e., that more than one entity is an employer of an individual employee) exists. But under the federal Lanham Act, franchisors must impose quality control standards in order to maintain the integrity and enforceability of their trademarks. These quality control standards may be considered to constitute such indirect control.

The dilemma faced by a franchisor in this environment: if the franchisor enforces quality control to protect the trademark and brand, it risks having joint employer liability imposed and being held liable for acts of its franchisees’ employees (for whom, in the vast majority of cases,  the franchisor has no legal or contractual right to control); if it does not, it weakens the strength of its marks. The Wisconsin bill provides assurance to franchisors offering franchises in the state of Wisconsin that enforcement of quality control standards will not result in an imposition of joint employer liability under Wisconsin law. 

The Good, the Bad, the Uncertain: Developments In Franchisor Liability

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          The legal debate over imposing vicarious liability of franchisors – or making franchisors liable for the acts of their franchisees and franchisees’ employees – has flared up this year, thanks in large part to a recent court decision and policy directives emanating from the Office of the General Counsel of the National Labor Relations Board.

          The franchise model assumes that franchisees merely license franchise trademarks, copyrights and other intellectual property from franchisors, and that the franchisee is not the agent of the franchisor.  While franchisors may insist that the franchisee follow quality control, marketing and product consistency standards that affect the franchisor’s trademarks, franchisors typically contractually disclaim any right to control day-to-day hiring, firing and supervision of employees.  But that does not prevent parties who assert claims against franchisees from also alleging that the franchisor should be liable as well, based on principles of agency.  The claimant alleges that the franchisee and its employees are agents of the franchisor, and thus the franchisor is liable as well.

          First, the good news for franchisors:  In late August, the California Supreme Court held that Domino’s Pizza LLC was not liable for the acts of a franchisee whose manager had allegedly harassed an employee.  The court’s decision was based largely on the terms of the franchise agreement between Domino’s and its franchisee.  The court did note, however, that a franchisor “will be liable if it has retained or assumed the right of general control over the relevant day-to-day operations at its franchised locations … and cannot escape liability in such case merely because it failed or declined to establish a policy with respect to that particular conduct.”

         Next, the bad news: in July, the Office of the General Counsel to the National Labor Relations Board announced that it would authorize complaints alleging that McDonald’s USA LLC is a “joint employer” of the employees of its franchisees.   The Office of the General Counsel found merit in charges that McDonald’s and its franchisees had violated the rights of employees “as a result of activities surrounding employee protests.”

          The NLRB release announcing the decision did not set forth the grounds as to why McDonald’s was deemed to be a joint employer, but the NLRB Office of the General Counsel has signaled, in another pending case, that it seeks to change the standard for determining when “joint employer” status is applicable.   Under the existing standard, which has been in place for 30 years, a finding of joint employer status is appropriate when two or more parties “share or codetermine those matters governing the essential terms and conditions of employment.” The International Franchise Association and other trade groups have filed a brief in the pending case, opposing the attempt by the NLRB Office of the General Counsel to re-define joint employer status so as to include situations where one party indirectly controls the other.

        While a revision to the definition of joint employer would affect many industries, it would have a massive impact on the franchise industry, whose business model is predicated in large part on the distinction between franchisor and franchisee.