On March 2, 2016, Governor Scott Walker(R), of Wisconsin, signed Wisconsin Senate Bill 422 into law. This law is important to franchisors because, under this new law, franchisors are not considered employers of their franchisees or their franchisees’ employees for purposes of state employment laws relating to worker’s compensation, unemployment insurance, employment discrimination, minimum wage, and wage payments, unless the following applies:
- The franchisor has agreed in writing to assume that role.
- The franchisor has been found to have exercised a type or degree of control over the franchisee or the franchisee’s employees that is not customarily exercised by a franchisor for the purpose of protecting the franchisor’s trademarks and brand.
As of now this law is only applicable in Wisconsin. However, it is good news for franchisors. It is in direct contrast to recent publications by several federal agencies ( e.g., NLRB) which have tried to make it easier for franchisors to be considered joint employers with their franchisees. Hopefully, other states will follow suit and pass similar state laws.
As always, we will keep up to date on any developments in this area and keep you informed.
On May 14, 2015 the Texas House passed Senate Bill 652 which states that a franchisor is not the employer of its franchisees or its franchisee’s employees. The bill is in response to recent actions by the National Labor Relations Board and the Board’s expansion of the standards of joint employment in the franchise setting.
The bill would amend Texas law to establish that unless a franchisor exercised direct control over a franchisee or franchisee’s employees beyond what is necessary to protect the franchisor’s brand, the franchisor will not be deemed an employer of a franchisee or a joint employer of the franchisee’s employees. The legislation is similar to the joint employment standard previously utilized by the National Labor Relations Board. The Texas bill addresses employment issues in the context of employment discrimination, wage payment, minimum wage and workers compensation.
The issue of joint employment has been front and center in franchising since the NLRB issued complaints against McDonald’s USA, LLC and franchisees of McDonald’s, as joint employers of the franchisee’s employees, alleging various labor law violations. The complaints are based upon the NLRB’s new standard that by possessing the ability to exercise control over a franchisee’s employment policies (whether exercised or not), the franchisor becomes a joint employer. This standard is a departure from the 30-year-old standard that treat two companies as joint employers only if both exercise a significant degree of control over the same employees.
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.
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.
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.