Setback in Seattle for IFA and franchise owners.

Earlier this week, a Washington federal judge rejected the argument of the International Franchise Association that Seattle’s new minimum wage law unfairly targets franchise owners in Seattle.  The new law will raise the minimum wage in Seattle to $15 per hour over the next several years.  The focus of the IFA’s court action was not whether the city had the power to raise the minimum wage, but the way the increase is to be implemented.  Small businesses will be allowed to implement the increase over a seven year period while large businesses (500 employees or more) must implement the increase in only three years.  However, the law places franchise owners in the large business category regardless of the number of employees the franchisee actually employs.  On its face, the law seems to unfairly burden franchise owners simply because they operate using the business format and trademarks of the franchisor.   As franchisees know, ownership of an independently owned franchised business does not equate to being a “large business” employing 500 people.  In fact, most franchised businesses are small, locally owned and lack the resources of companies who employ 500 or more people.   The IFA stated that it will continue its’ fight against a law that it perceives to unfairly discriminate against franchise owners.

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Filed under Franchise Basics, Franchise Insight, Franchise Law, In The News, Restaurant & Hospitality Law, The Franchise Legislation Monitor

PHILADELPHIA AND PAID SICK LEAVE

On February 12, 2015, the Philadelphia City Council passed legislation mandating paid sick leave in Philadelphia.  Mayor Michael Nutter signed the legislation into law later that day.    The law, effective 90 days after signing, requires businesses with 10 or more employees to guarantee at least one hour of paid sick leave for every 40 hours worked.  Franchised businesses within Philadelphia, particularly those in the restaurant industry, lobbied against the bill saying that it will discourage businesses from moving to the city and deter current companies from expanding.  Efforts to increase the threshold number of employees from 10 to 15 or 50 ultimately failed.  However, the new law in Philadelphia may be short lived as Pennsylvania considers paid leave preemption in House Bills 1807 and 1796 filed earlier this year.  Both bills would ensure local municipalities cannot pass piecemeal paid leave requirements on businesses in Pennsylvania.  Twelve other states have already passed similar preemption bills.

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Franchisors should focus on the brand to mitigate risk.

The standards used to determine joint employer status and the proper identification of an individual as an independent contractor within franchise systems are changing.  In order for a franchisor to minimize liability associated with joint employer status, vicarious liability and misclassification of employees as independent contractors, franchise systems must focus on controls that relate primarily to the protection of a franchisor’s brand and the integrity of the product or services provided to the marketplace by its’ franchisees.  By focusing on these essential elements of a franchise system, rather than the day-to-day operation of a franchisees’ business, the franchisor may mitigate the risk associated with the on-going attack against the franchise business model.  Specifically, franchisors should avoid the following;

  • Imposing employment policies/practices upon the franchised business
  • training employees of the franchised business
  • imposing scheduling requirements and pricing controls upon the franchised business
  • securing contracts/customers on behalf of the franchised business
  • sub-leasing office/retail space to the franchised business
  • acting as a guarantor/surety of the franchised business

In order to mitigate risk, franchise systems should examine their franchise agreements, operating manuals and internal policies to determine where a system may step over the line of policing essential policies to ensure brand integrity and into the day-to-day business operations of its’ franchisees.

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NJ Sick Leave Legislation Alert

Since San Francisco enacted mandatory sick leave legislation in 2006, efforts to pass similar laws have gained momentum in municipalities and states across the nation. Recently the New Jersey assembly became the latest state legislature to advance a bill, A2354, which would require most employers to provide their employees with annual paid sick leave. If it becomes law, and odds are strong that it will, it would make New Jersey the fourth state – after California, Connecticut, and Massachusetts – mandating paid sick time for all workers, and it would raise a number of challenging legal and compliance issues for both small and large franchised businesses.

At the core of the bill is the imposition of a legal obligation on employers to provide one hour of earned sick leave for every 30 hours an employee works. Employers with an average of fewer than 10 employees (which includes part-time and temporary workers) must allow each employee to accrue and use up to 40 hours per calendar year; employers with an average of more than 10 employees would have to allow up to 72 hours per calendar year.

As with any statute, however, the devil is in the details. The following is a brief summary of the bill’s provisions that pose the greatest risk to employers’ bottom lines:

Broad Application. Permissible use of earned sick leave is fairly broad under the bill. It permits an employee to use sick leave for themselves or a family member for: preventive medical care; the diagnoses, care, treatment or recovery from mental or physical illness; physical injury; and any adverse health condition. It also provides paid leave to employees who miss work due to closure of the workplace or a child’s school due to a public health crisis.

No Preemption Means Conflicting Employer Obligations. Many communities in New Jersey have already passed mandatory sick leave laws in the past year, including Newark, Jersey City, and Trenton, although the maximum leave provided is generally 40 hours. The state bill, however, does not include a provision which preempts those municipal laws, which would quickly lead to compliance conflicts for employers who have workers covered under different (or multiple) sick leave laws. This will quickly lead to confusion.

Disproportionate Impact on Small Businesses. While proponents argue the state bill is a pro-business and pro-public health policy that will ultimately reduce worker absenteeism and lower health costs for employers, businesses which heavily rely upon part-time workers, such as small local business, restaurants and seasonal businesses on the New Jersey coast, stand to disproportionately suffer adverse financial impact as a result of the legislation’s presumption that a large employer is one with 10 or more total employees. It’s common for these businesses to be staffed with part-time workers consisting of students and people with other full- or part-time jobs, and a small business can easily reach the 10-employee threshold simply because their workers have limited availability.

Practical Legal Ramifications. The bill would also impose certain record-keeping requirements and specifies when an employer may require documentation from an employee requesting or taking sick leave. In addition, the bill expands the legal rights of employees in two ways that raise fairly significant ramifications for even the most well-intentioned employer. First, if an employee makes any statement involving paid sick leave or invokes any right under the law, the employee receives a 90-day window in which any “adverse action” they suffer related to their job is presumed to be retaliatory. “Adverse action” is a broad term which, depending on the circumstances, could include merely changing the employee’s shift schedule. Second, unlike other states in which enforcement is entrusted to a state agency, the New Jersey bill permits an employee to sue the employer to enforce the law’s requirements. So instead of deferring resolution of disputed sick leave matters to a state regulator, aggressive plaintiffs’ lawyers will enjoy a wind fall.

It will be at least several months until the bill comes before the full New Jersey legislature for vote, and even if passed will require an openly reluctant Governor Chris Christie to sign it into law before it can take effect. However, the recent passage of similar leave laws in New Jersey’s three largest cities has led many observers to conclude it’s only a matter of time before New Jersey enacts state-wide legislation. Employers would therefore benefit from monitoring the bill and reviewing their existing sick leave policies to determine whether and to what extent its likely passage in New Jersey will affect workplace coverage and operating costs.

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Gift Card Alert

Does your business issue gift cards? Do you outsource management of your gift cards to a third party or subsidiary? If so, a recent whistleblower lawsuit filed in Delaware underscores the need to carefully re-examine your gift card program or risk significant fines – up to 125 percent of unredeemed gift card balances plus three times the amount otherwise due to the state in which your company operates.

The lawsuit was unsealed recently after having been filed in June 2013 against 33 large retailers, the National Restaurant Association, and Card Compliant, Inc. The lawsuit claims that Card Compliant (and its predecessor) conspired with the other defendants to circumvent Delaware’s law that unredeemed gift card balances are to be turned over to the state as unclaimed property. State of Delaware ex rel. French v. Card Compliant, LLC, et al., N13C-06-289 (Superior Court of Delaware, New Castle).

All states have laws which govern unclaimed property, and some, like Delaware, consider the unredeemed balance of gift cards to fall within the definition of unclaimed property after a specified period of inactivity. Delaware further requires the retailer to remit the value of that balance to the state once the specified period has expired. Other states do not consider unredeemed gift card balances to be unclaimed property or don’t require it to be remitted to the state. Thus, whether or not a business is obligated to turn over those balances to the state depends entirely on which state it calls home, generally the one in which it was formed.

To ensure your business doesn’t inadvertently fall within the sights of state law enforcement due to the failure of what may otherwise seem to be a perfectly legitimate gift card program, here are a few tips to mitigate your risk:

  1. Review all programs which provide for the issuance of gift cards, promotional certificates, and merchandise credits to ensure they comply with your state requirements, which would generally be those of the state of your corporate formation.
  2. If you use a subsidiary to manage these programs, analyze its form and substance. Ensure that it operates from an independent economic standpoint and isn’t merely a shell. Ensure proper intercompany agreements are in place and all formalities are followed.
  3. Check if your state has a voluntary disclosure program where you can report and remit unpaid amounts which you may find are subject to the state’s unclaimed property laws. Organizations formed in Delaware have until June 30, 2014 to do so.
  4. If you have a business relationship with a third party service provider, review your agreements and analyze whether they require amendments to minimize your exposure to potential fines and penalties.

Please contact our office with any questions.

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