Joint Employer and Normal Labour and Employment Points

This article is taken from Lexology GTDT’s Practice Guide to Franchise. Led by DLA Piper, the publication examines key themes topical to cross border franchising.

Introduction

One area that has plagued the franchising business model in recent years is the threat of joint employer liability. Franchisors are increasingly targeted in litigation, regulatory actions and legislation as joint employers of the employees of their franchisees. This is disruptive to both franchisors and franchisees as it can dissuade entrepreneurs from franchising and increase the cost of doing business overall. The problem knows no borders. Expansion of joint employment liability has become a trend in countries such as the United States, Canada and Australia. Despite this, no consensus has emerged on when joint employment liability should be found. Instead, the franchise relationship is judged against a variety of tests that change from one jurisdiction to the next and depends on the facts of each case. The legal landscape also continues to evolve with technological, cultural and political shifts. With no final resolution in sight, franchisors and franchisees must not only remain vigilant for developments in this area in the jurisdictions in which they operate, but also take precautions to reduce their joint employer exposure.2

State of the joint employer law

Under a joint employer theory, two or more entities, such as a franchisor and franchisee, may be deemed jointly liable for labour and employment law claims asserted by employees who are formally employed by one employer (the franchisee) if the other putative employer (the franchisor) exercises sufficient control over the employment terms and conditions of the employees. However, the test for determining whether a joint employment relationship exists varies by jurisdiction, statutory scheme and the facts of each case.

United States

The National Labor Relations Act

The National Labor Relations Act (NLRA) is the federal labour law that governs the relationship between employers and employees by, among other things:

• protecting employees’ rights to unionise;3
• prohibiting employers from engaging in specified unfair labour practices;4 and
• imposing obligations on employers to collectively bargain with representatives of employees.5

The National Labor Relations Board (NLRB) is the agency charged with administering the NLRA.6 It is composed of five members who are appointed by the President to five-year terms, with Senate consent, and the term of one member expires each year.7

In late August 2015, the NLRB abandoned 30 years of precedent when it adopted a new, broad standard for determining whether two or more businesses are joint employers for labour law infractions under the NLRA in its controversial Browning-Ferris decision.8 For decades, the NLRB and courts had measured NLRA joint employer liability under the NLRA by focusing on whether the putative employers each exercised ‘direct and immediate’ control over the employees’ ‘essential terms and conditions of employment’.9Browning-Ferris overruled that test and instead held that two or more entities could be joint employers if they merely reserved control or exercised indirect or limited control over the workers’ essential terms and conditions of employment.10 Essential terms include personnel matters such as hiring, firing, discipline, supervision, direction, training, wages, hours and benefits, staffing, scheduling, and work assignments.11 The use of technology, tools and resources to exert control may be examined.12

Although Browning-Ferris was not a franchise case, franchising and other outsourcing arrangements were certainly scrutinised at the time of the decision as attempts to subvert meaningful collective bargaining about workers’ employment terms and conditions and escape liability for unfair labour practice charges. At the time, the General Counsel of the NLRB argued in favour of expanding joint employer liability to franchisors, noting that some can and do control employees of franchisees by, among other things:

• tracking the sales, inventory and labour costs of franchisees;
• calculating or imposing numbers for the labour needs of franchisees;
• setting or overseeing employee work schedules;
• tracking franchisee wage reviews;
• tracking how long it takes for employees to fill customer orders;
• requiring franchisees to use labour scheduling technology and point of sale systems that track any of the above; and
• accepting employment applications for franchised locations through the franchisor’s system and screening applicants through that system.13

The NLRB, in fact, instituted numerous unfair labour practice charges against McDonald’s and its franchisees as joint employers after workers of McDonald’s franchised locations participated in nationwide fast food worker protests concerning their wages and other working conditions.14 At the time of writing, these proceedings are ongoing and awaiting a final determination.15

As for Browning-Ferris, the case has been making its way through the appeals process ever since the decision was issued.16 In December 2017, and while the appeal was pending, the NLRB attempted to overturn the Browning-Ferris joint employer test in Hy-Brand Industrial Contractors Ltd, but its ruling was later vacated because of ethical concerns.17 Then, on 28 December 2018, the federal appellate court presiding over the case issued a mixed ruling, affirming the NLRB’s articulation of the joint employer test as including reserved and indirect control, but finding that the NLRB failed to properly define ‘indirect control’ and remanding the case to the board for further proceedings.18 On remand, the board’s general counsel urged the board to return to its longstanding previous standard and hold that indirect or unexercised potential control alone is insufficient to support a joint employer finding.19 In July 2020, the board reversed its 2015 determination and found that the new joint employer standard should not have been applied and that Browning-Ferris was not a joint employer under the board’s longstanding standard.20

The NLRB’s General Counsel Office has also issued an advice memorandum addressing joint employment in another franchise system that offers some guidance to franchisors.21 The case arose out of a Freshii franchisee’s termination of two employees who were attempting to unionise its workforce.22 In analysing the Freshii franchise system, the General Counsel’s office concluded there was no joint employer relationship between the franchisor and franchisee, whether under the traditional or Browning-Ferris standard, because:

• the franchise agreement explicitly stated that the franchisor’s system standards did not include ‘any personnel policies or procedures’ and the franchisor ‘neither dictates nor controls labor or employment matters for franchisees and their employees. . .’;
• although the franchisor provided human resources guidance in its Operations Manual (even providing a sample employee handbook), the franchisee had the power to decide whether to adopt the franchisor’s guidance and the franchisee had, in fact, created its own employee handbook with its own personnel policies;
• the franchisor had no involvement in hiring, firing, discipline, supervision, or setting wages, raises or benefits of the franchisee’s employees;
• the franchisor was not involved, directly or through point-of-sale systems or scheduling software, in the franchisee’s scheduling and setting work hours of its employees;
• the franchisor’s pre-opening training programmes focused mainly on restaurant operations;
• the franchisor’s monthly field reviews were limited to inspecting the franchisee’s compliance with the franchisor’s mandatory system standards; and
• the franchisor did not interfere with or instruct the franchisee on how to respond to the employees’ organising efforts, even though the franchisee requested the franchisor’s advice.23

Although the franchisor exercised controls over the franchisee’s operations – regarding food preparation, recipes, menu, uniforms, decor, store hours and pre-opening training – those controls were ‘limited to ensuring a standardized product and customer experience’ and tied to Freshii’s ‘legitimate interest in protecting the quality of its product and brand’.24 Such controls were insufficient to interfere with any meaningful collective bargaining between the franchisee and its employees.25

Given the inconsistent application of the joint employer standard, the NLRB also engaged in rulemaking to provide clarity. On 14 September 2018, the NLRB proposed a rule to undo Browning-Ferris and reinstate its longstanding ‘direct and immediate control’ test for joint employer status:26

to be deemed a joint employer under the proposed regulation, an employer must possess and actually exercise substantial direct and immediate control over the employees’ essential terms and conditions of employment of another employer’s employees in a manner that is not limited and routine.27

The final rule was unveiled on 26 February 2020, and it took effect on 27 April 2020.28 It makes clear that to be a joint employer, a business must possess and exercise substantial direct and immediate control over one or more essential terms and conditions of employment of another employer’s employees; sporadic, isolated or de minimis control is not enough.29 However, the existence of this rule is now in question under a new Joe Biden administration and its changes to the NLRB.30

The Fair Labor Standards Act

The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, and record-keeping standards affecting employees in the private sector.31 The Wage and Hour Division of the US Department of Labor (DOL) administers and enforces the FLSA.32

The NLRB has not been alone in its efforts to expand joint employment liability to the franchising industry. The DOL also adopted, through administrative guidance, new and expansive standards for determining joint employment under the FLSA on 20 January 2016, but the guidance was rescinded effective 7 June 2017.33

Even so, the concept of employment is broadly defined in the FLSA34 and the applicable regulations expressly recognise that two or more employers may jointly employ an employee.35 ‘Employee’ is defined as ‘any individual employed by an employer’.36 ‘Employer’ is defined as ‘any person acting directly or indirectly in the interest of an employer in relation to an employee’.37 And ‘employ’ means simply ‘to suffer or permit to work’.38 In line with this broad coverage, the regulations set out three instances in which a joint employment relationship likely exists:

• where the entities share the employee’s services or interchange employees;
• where one employer is acting directly or indirectly in the interest of the other employer in relation to the employee; or
• where the employers are not completely disassociated regarding the employment of a particular employee and share control of the employee because one employer controls, is controlled by or is under common control with the other employer.39

Based on its expansive coverage, the test for analysing joint employer status under the FLSA varies widely by jurisdiction and is highly dependent on the facts of the case. Courts typically apply the ‘economic realities test’, which focuses on the economic realities of the employment relationship in light of the totality of the circumstances, while others focus on the narrower, common law agency theory of control, which is similar to the NLRB’s traditional control standard. Others use a hybrid test of the two.40

Factors normally considered in the economic realities analysis include whether the putative employer had the power to hire and fire the employees, supervised and controlled employee work schedules or conditions of employments, determined the rate and method of pay, maintained employment records, and whether the work is integral to the putative employer’s business.41 Because of the fact-intensive nature of the inquiry, courts hesitate to dismiss joint employment claims early on in litigation, without allowing plaintiffs the opportunity to take discovery relevant to their claims.42

With respect to the control test, courts in several jurisdictions have adopted a more refined test grounded in vicarious liability principles, which assigns joint employment liability only if the franchisor actually controls the specific issue of the franchisee’s business that caused the alleged harm to the employee of the franchisee.43

Notably, on 25 January 2017, the US Court of Appeals for the Fourth Circuit – which covers Maryland, North Carolina, South Carolina, Virginia and West Virginia – adopted a new FLSA joint employment test that is broader than any other joint employment test to date.44 According to the Fourth Circuit, the ‘fundamental question’ guiding the FLSA joint employment analysis is:

whether two or more persons or entities are ‘not completely disassociated’ with respect to a worker such that the persons or entities share, agree to allocate responsibility for, or otherwise codetermine – formally or informally, directly or indirectly – the essential terms and conditions of the worker’s employment.45

To answer this question the Fourth Circuit identified six non-exhaustive factors to consider:

• whether, formally or as a matter of practice, the putative joint employers, directly or indirectly, jointly determine, share, or allocate the ability to direct, control, or supervise the worker;
• whether, formally or as a matter of practice, the putative joint employers jointly determine, share or allocate the power to – directly or indirectly – hire or fire the worker or modify the terms or conditions of the worker’s employment;
• the degree of permanency and duration of the relationship between the putative joint employers;
• whether one putative joint employer controls, is controlled by, or is under common control with the other putative joint employer, either through shared management or a direct or indirect ownership interest;
• whether the work is performed on a premises owned or controlled by one or more of the putative joint employers, independently or related to one another; and
• whether, formally or as a matter of practice, the putative joint employers jointly determine, share or allocate responsibility over functions ordinarily carried out by an employer, such as:
  • handling payroll;
  • providing workers’ compensation insurance;
  • paying payroll taxes; or
  • providing the facilities, equipment, tools or materials necessary to complete the work.46

The presence of one factor or mere indirect control can be sufficient under this test.47 The US Supreme Court was asked to review the correctness of the Fourth Circuit’s test but declined to do so.48

The Fourth Circuit’s ‘completely disassociated’ test sets an extremely low bar for imposing joint employment liability in those states – and beyond as the test gains traction in other states.49 The very nature of franchising requires some degree of association between franchisor and franchisee. According to the Fourth Circuit, however, no joint employment liability will result if the franchisor disassociates itself from the franchisee regarding the workers’ key terms and conditions of employment or ensures that the franchisee covers its workers’ legal entitlements under the FLSA.50 But the second option would require the franchisor to monitor and ensure its franchisees’ compliance with the FLSA, which would expose the franchisor to joint employment liability under other laws, including the NLRA.51 And although the first option seems more feasible, it is unclear how courts will interpret and apply that prong. It is possible that courts may interpret controls that franchisors implement to protect their trademarks and ensure brand standardisation as associating with the franchisee on key working conditions.52 In fact, the Fourth Circuit reached a joint employer finding based on several controls aimed at trademarked brand quality controls.53

A finding that a franchisor and franchisee jointly employ the franchisee’s employees under the FLSA means that a franchisor will be liable when the franchisee fails to properly pay its employees the required minimum or overtime wage or to maintain appropriate time records. Not only can the franchisor be on the hook for the amount of unpaid wages, but the FLSA also provides for liquidated damages (ie, double damages) for wilful violations and attorneys’ fees.54 This is an expensive proposition for franchisors given how prevalent and costly wage and hour claims are.55

Seeking to add certainty regarding what business practices may result in joint employer status, the DOL engaged in rule-making to clarify the FLSA joint employer standard.56 The DOL released its final rule, which was set to take effect on 16 March 2020.57 The new rule adopts a four-factor balancing test for determining joint employment liability under the FLSA and examines whether the potential joint employer:

• hires or fires the employee;
• supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
• determines the employee’s rate and method of payment; and
• maintains the employee’s employment records.58

Additional factors may be considered, but no single factor is dispositive, and the particular weight to give to each factor is for the factfinder to decide.59

In response to significant comments received regarding whether certain business models or practices – such as franchising – would be more likely to result in a joint employer finding, the DOL answered the question in the negative. The final rule provides that ‘[o]perating as a franchisor or entering into a brand and supply agreement, or using a similar business model does not make joint employer status more likely.’60 Similarly, the final rule states that contractual obligations requiring ‘quality control standards to ensure the consistent quality of the work product, brand, or business reputation’, or obligating the direct employer to comply with the law (including the FLSA, requiring sexual harassment policies, or setting health and safety standards), do not make joint employer status more likely.61

However, 18 states sued to block the rule before it took effect on grounds that it conflicted with the FLSA, and a federal court largely struck down the rule in September 2020, which decision is under appeal.62 The DOL, now under a new administration, is developing a new regulation on joint employment to effectively rescind the 2020 rule and return to a broader joint employer view.63

Federal anti-discrimination law

Joint employment liability can also apply to franchise relationships as a result of workplace discrimination, harassment and retaliation in a franchised location.

Title VII of the Civil Rights Act of 1964 (Title VII) prohibits employers with 15 or more employees from discriminating against employees on the basis of race, colour, religion, sex (including gender and pregnancy) and national origin.64 The Age Discrimination in Employment Act (ADEA) prohibits discrimination on the basis of age (40 and over).65 It applies to employers with 20 or more employees.66 The Americans with Disabilities Act (ADA) prohibits discrimination on the basis of disability in employment.67 It also requires employers to reasonably accommodate qualified individuals with a disability if they can do so without suffering undue hardship.68 The ADA applies to employers with 15 or more employees.69 Each of these federal anti-discrimination laws further prohibit harassment and retaliation against individuals who complain, oppose, or testify or otherwise participate in any investigation or proceeding of discrimination.70

Under these statutes, an employee may have more than one employer. Each of the statutes broadly defines ‘employee’ as an individual employed by an employer and ‘employer’ as an individual or entity engaged in an industry affecting commerce.71 Accordingly, most private employers are covered as long as the numerical threshold of employees is satisfied.

Similar to the FLSA, there is not one test that is uniformly used to determine joint employer status under these anti-discrimination laws. Enforcement guidance by the Equal Employment Opportunity Commission (EEOC), which is the agency responsible for enforcement of the federal anti-discrimination laws, provides that two or more employers can be deemed joint employers if they exercise sufficient control over the employee.72 Factors that can indicate sufficient control to trigger liability include:

• the putative employer controls when, where and how the employee performs the job;
• the work does not require a high level of skill or expertise;
• the putative employer supplies the tools, materials and equipment;
• the work is performed on the premises of the putative employer;
• there is a continuing relationship between the employee and putative employer;
• the putative employer has the right to assign additional projects to the employee;
• the putative employer sets the hours of work and the duration of the job;
• the employee is paid by the hour, week or month, as opposed to on a project basis;
• the employee has no role in hiring and paying assistants;
• the work performed is part of the putative employer’s regular business and the employee is not engaged in his or her own business;
• the putative employer provides benefits such as insurance, leave or workers’ compensation to the employee;
• the employee is considered an employee of the putative employer for tax purposes;
• the putative employer can discharge the employee; and
• the employee and putative employer believe that they are creating an employer–employee relationship.73

Again, no single factor is determinative and an overall assessment of the parties’ relationship must be made.74 The test will therefore vary by jurisdiction, with some jurisdictions focusing on the common law agency test of control, the economic realities or another variation.75

Upon a finding of liability, a successful employee may generally recover the following remedies from the joint employers:

• injunctive relief;
• back pay;
• compensatory damages (including for future loss and emotional distress);
• front pay (future income the employee would have earned);
• attorneys’ fees and costs; and
• punitive damages for intentional violations.76

Following in the footsteps of the NLRB and the DOL, the EEOC was also expected to clarify when an entity covered under the federal anti-discrimination laws would qualify as a joint employer last year, but no definitive action ensued. This means that the EEOC’s joint employer test remains unchanged.77

Legislative efforts to address the joint employment question

Agency rule-making is not a permanent solution to the joint employment conundrum. Legislative efforts have also been undertaken to provide long-term clarity for businesses in franchising and other industries.

In November 2017, the US House of Representatives (House) passed the Save Local Business Act, which seeks to amend both the NLRA and the FLSA’s definitions of ‘employer’ so that joint employment liability is imposed only when an entity ‘directly, actually, and immediately, and not in a limited and routine manner, exercises significant control over the essential terms and conditions of employment’.78 Those ‘essential terms and conditions’ include hiring, discharging, determining wages and benefits, daily supervision, assigning work schedules, positions and tasks, and disciplining of employees.79 The bill passed the House with bipartisan support, but it stalled in the US Senate.80 The opposition views the bill as eliminating accountability for employers who have moved away from direct employment through subcontracting, franchising, temporary staffing and other similar arrangements.81

On 31 August 2018, the House then introduced the Trademark Licensing Protection Act.82 If enacted, the bill would amend the federal trademark statute (the Lanham Act), so that a franchisor or licensor’s controls to preserve its trademarks through brand controls – which ensure uniformity to the consuming public – cannot be proof of joint employment (or principal-agent) liability.83 The proposed amendment would help bring clarity to franchisors who are being faulted as joint employers for imposing certain controls vital to their trademarks and franchised brands. At the root of the Lanham Act is the requirement that all licensors, including franchisors, control their licensees’ use of their trademark or else risk losing all rights in that mark.84 Franchisors, therefore, have long imposed on their franchisees uniform standards of appearance, operations, and products and services to control the nature and quality of goods and services bearing their marks.85 Failure to establish these quality control standards or enforce the standards with franchisees may indeed result in abandonment of the mark.86

The problem in the current legal landscape is that the Lanham Act fails to define what level of control is acceptable without resulting in joint employment liability. Recent cases are blurring the lines of control that typically exist in a franchising relationship to expand the reach of joint employment liability to franchisors.87 The proposed amendment would make it clear that:

any control . . . for the purpose of preserving the goodwill, reputation, uniformity, or expectation of the public of the nature and quality of goods or services associated with the mark, may not be construed as establishing an employment or principal-agent relationship between the owner of the mark and the related company.88

‘Employment or principal-agent relationship’ would include ‘any type of joint employer relationship, single employer relationship, alter ego relationship, successor relationship, or other employment-related or principal-agent liability status or relationship.’89 The bill is currently awaiting further action by a House committee and has bipartisan support.90

However, with the current political climate, the future of these bills (or other similar bills) is unclear, and other legislative efforts to expand protections for workers are at play. In February 2020, the House passed the Protecting the Right to Organize Act of 2019 (the PRO Act).91 This bill sought to codify the expanded joint employer standard articulated in Browning-Ferris, which would impose NLRA liability for mere indirect or reserved control over essential working conditions.92 Although the bill did not move under the prior administration, it is widely supported by the current administration and the Democratic majority in Congress.93

Beyond federal efforts, several states have enacted some form of ‘joint employer’ legislation to exempt franchise relationships from joint employment liability for the purposes of various state employment claims, but their scope varies significantly and they do not apply to claims under federal law.94 Other states are resisting such legislation and instead are passing laws that make it more difficult to classify independent contractors and potentially increasing joint employer liability.95

Canada

Canadian law also recognises the concept of joint employment in both its common law and legislation. As in the United States, Canada has taken steps in recent years to broaden joint employment liability to franchises and other related companies. Liability can range from employment law obligations such as wages, overtime, benefits, severance pay and withholding of taxes, to wrongful dismissal and human rights complaints, as well as labour law obligations such as franchisor participation in the collective bargaining process.

Under the ‘common employer’ doctrine, Canadian courts examine whether two or more companies function as a ‘single, integrated unit’ such that they will be deemed common employers for purposes of labour and employment liability.96 Courts will look beyond complex corporate structures to protect employees, and ‘[a]s long as there exists a sufficient degree of relationship between the different legal entities who apparently compete for the role of employer, there is no reason in law or in equity why they ought not all to be regarded as one.’97 The key factor will be ‘the element of common control’, which will depend on the facts of the case.98

For example, existence of any of the following factors will generally trigger the common employer doctrine:

• ‘an intention to create an employer/employee relationship’ between the employee and the group of companies;
• the entity exerts ‘effective control over the employee’;
• the employee served all entities within the group, irrespective of an employment contract;
• the employee is paid by one entity while working for another; and
• the companies act as ‘a highly integrated or seamless group’.99

Bare allegations that the two potential employers exercise significant control and share responsibilities over the employee, without explanation of the control or of the interrelationship and commonality of operations, will not do.100

Although the doctrine is most frequently used in cases concerning dismissed employees who sue their direct employer and other closely related companies – not necessarily franchisors – the doctrine can apply in the franchise context as well.

In addition to the common law, there are statutes that have expanded joint employment liability to franchisors in Ontario. The Employment Standards Act 2000 (ESA) covers employment standards such as wages, hours and leave, and the Labour Relations Act 1995 (LRA) governs labour relations in Ontario.101 In 2017, the Ontario government considered – but did not adopt owing to the strong objections of the franchising legal and business community – proposed changes to both statutes that sought to automatically deem a franchisor the joint employer of its franchisees’ employees for certain purposes.102

Even though no automatic joint employment liability rule was adopted, the Ontario legislature did amend the ESA to make it easier to find that franchisors are joint employers under the act.103 Effective 1 January 2018, separate legal entities may be treated as one employer if they carry on ‘associated or related’ business activities.104 Before the amendment, separate entities were only treated as one employer if they had also acted with ‘the intent or effect’ of ‘directly or indirectly defeat[ing] the intent and purpose’ of the act.105 The ESA imposes joint and several liability for any violation and for any wages owed to an employee of any of the entities.106

By relaxing the standard, employees of franchisees may more freely bring claims under the ESA against the franchisor, the franchisee or both. However, it remains to be seen how courts will apply the new standard since there are no published decisions applying it.107

Similarly, the LRA permits the Ontario Labour Relations Board (OLRB – the Ontario equivalent of the NLRB) to declare that companies are ‘related employers’ – joint employers – if they are engaged in ‘associated or related activities or businesses’ and fall ‘under common control or direction’.108 In exercising its discretion to treat two or more entities as one employer, the OLRB must weigh the legislation’s objectives: ‘preservation of bargaining rights, viable collective bargaining structures, and direct dealings between bargaining agent and the entity with real economic power over employees’.109

Importantly, ‘[t]he applicability of section 1(4) to franchise arrangements must be determined case by case. There is no general presumption that a section 1(4) declaration is appropriate, nor the reverse. Each case must be considered on its own facts.’110 In the few cases where the OLRB has been tasked with deciding whether franchisors and franchisees are related employers, the OLRB has not uniformly ruled one way or another, focusing instead on the franchise relationship, the extent of the controls over the franchisee’s employees and whether the franchise arrangement contravenes the LRA’s intent.111

Franchisors may also be considered an employer of franchisees’ employees for purposes of harassment and discrimination claims if they exercise a ‘sufficient degree of control’ or ‘substantial control over the day-to-day operations’ of the franchised location and its employees.112 Traditional controls imposed by the franchise agreement to protect the franchisor’s trademarks that do not involve substantial and significant control over day-to-day employment-related matters will generally not be enough to find the franchisor to be liable as an employer.113 Problematic controls for franchisors include controls over franchisees’ advertising for interviewing, hiring, supervising, setting wages, work hours and discipline of the employees.114

Although no bright line rule exists in Canada, the more control a franchisor has or actually exerts over the employment practices of its franchisees’ employees, the more likely it will be found a joint employer. Franchisors can mitigate this risk by instituting steps to sever controls over franchisees’ advertising for recruiting, interviewing, hiring, supervising, setting wages, work hours, training and discipline of their employees.115

Australia

Australia enacted the Fair Work Amendment (Protecting Vulnerable Workers) Act of 2017 after widespread media coverage exposed rampant wage fraud of workers employed by franchisees in certain large franchise systems.116

The new law amended the Fair Work Act of 2009 (FWA), which governs the employment relationship in Australia, to strengthen protections for vulnerable workers and bolster enforcement mechanisms and penalties against non-compliant employers.117, 118 Beginning on 27 October 2017, the amendment also expanded liability for employment law violations to certain franchisors and holding companies.119 Specifically, the law now requires ‘responsible franchisor entities’ to take ‘reasonable steps’ to ensure that their franchisees comply with employment laws, or else they could be found liable for their franchisees’ employment law violations.120

As amended, the FWA broadly defines a ‘responsible franchisor entity’ to include any person who is a franchisor (or sub-franchisor) of a franchise and ‘has a significant degree of influence or control over the franchisee entity’s affairs’.121 The breadth of potential joint employment liability becomes clear when the two prongs are examined. The term ‘franchise’ has the same meaning as under the Corporations Act 2001.122 It includes any:

arrangement under which a person earns profits or income by exploiting a right, conferred by the owner of the right, to use a trade mark or design or other intellectual property or the goodwill attached to it in connection with the supply of goods or services.123

Moreover, either ‘influence or control’ can be enough, and the influence or control need not be limited to the franchisee’s employment matters. In effect, the new law reaches nearly all franchisors, as well as licensors and distributors, in Australia.124

To impose liability, the ‘responsible franchisor entity’ must have known or could reasonably be expected to have known that the violation by the franchisee would occur or that a violation of the same or similar character was likely to occur.125 The franchisor will not be liable if it can show it took ‘reasonable steps’ to prevent the franchisee’s violation.126 In determining whether ‘reasonable steps’ were taken by the franchisor, a court may consider ‘all relevant matters’, including, but not limited to:

• the size and resources of the franchise;
• the extent to which the franchisor had the ability to influence or control the franchisee’s conduct;
• any action the franchisor took to ensure that the franchisee had a reasonable knowledge and understanding of the law’s requirements;
• the franchisor’s arrangements (if any) for assessing the franchisee’s compliance with the law;
• the franchisor’s arrangements (if any) for receiving and addressing possible complaints about alleged underpayments or other alleged violations; and
• the extent to which the franchisor’s arrangements (whether legal or otherwise) with the franchisee encourage or require the franchisee to comply with this law or any other workplace law.127

In the event a breach is found, the court may order the franchisor to pay any underpayments owed to the employees of the franchisee and penalties for each violation of up to A$12,600 for individuals and A$63,000 for corporations.128 The franchisor may then initiate court proceedings to recover the paid amounts from the franchisee.129

The Fair Work Ombudsman has issued a comprehensive guide to help franchisors in promoting compliance with workplace laws in their franchise systems.130 The guidance indicates that the agency expects franchisors to take proactive steps to ensure their franchisees’ compliance, including educating and training franchisees on workplace laws and responsibilities, monitoring compliance through audits of franchised locations, and taking further action as needed to address uncovered violations.131 The guidance even suggests that franchisors can:

• incorporate the agency’s ‘Fair Work Handbook’ into the franchisor’s operations manual, or provide it as a standalone resource for franchisees;
• ‘keep franchisees regularly updated about their obligations under workplace laws and where they can get help’;
• provide franchisees templates that show them what to do, including the agency’s free templates;
• ‘implement human resource management systems or software to help . . . franchisees with consistent and compliant workplace practices’;
• ‘engage qualified human resources or industrial relations staff to train, update and assist franchisees’;
• recommend the agency’s record-keeping application and direct franchisees to the agency’s online pay tools and online learning centre; and
• assist franchisees to resolve workplace disputes with their employees.132

Practical considerations

Although recent moves indicate a favourable shift in the joint employment legal landscape, this area is still far from resolved. Courts and agencies apply different tests in examining joint employer status, and irrespective of the test used, the analysis will be driven by the specific facts of each case.

What is clear is that the joint employment question hinges on control. Given the current state of the law, any control – even if only tangential – concerning employment matters at the franchisee level, including hiring, firing, discipline, supervision, training, record-keeping, work hours and schedules, job duties and assignments, compensation and benefits, can be viewed as evidence of possible joint employment liability.133 Franchisors should therefore be cognisant of the applicable law in their jurisdiction and be mindful of the controls they impose on franchisees to ensure those controls are properly focused on protecting the franchisor’s trademarks and brand, not franchisees’ employment practices.

Because it is possible that some of the alleged ‘controls’ may be beneficial to the franchise system, a cost-benefit analysis of the cost of potential liability and benefit of exercising control should also be performed. For example, tracking data points such as labour costs and the amount of time it takes franchisees’ employees to fill customer orders may be beneficial to a franchisor and franchisee as it could help optimise franchise operations. However, the risk of tracking such labour figures is that some of that information would later establish wage and hour violations. Or an emerging franchisor may deem it useful to provide its new franchisees with template employment forms or policies to reduce their costs of compliance. However, the franchisor may be risking assuming full responsibility for updating those forms or policies to comply with all labour and employment laws and defending joint employment claims based on those forms or policies.

Although at first glance it might appear that only two options exist – either assume full control over franchisees’ operations, including employment practices, or pull back operational controls – franchised businesses can find a middle ground and take precautions to mitigate a finding of joint employer status. In any key documents governing the franchise relationship, the parties will want to ensure that control over and liability for the employment relationship is allocated to the franchisee as the direct and sole employer. At a minimum, the following should be carefully reviewed to assess whether any imposed or reserved controls by the franchisor extend beyond protecting the trademarks and ensuring brand uniformity and delve into franchisees’ employment matters:

• franchise agreements;
• franchise disclosure documents;
• operations manuals;
• training materials and training of field and operations personnel;
• any sample employment materials provided to franchisees (including employee handbooks and policies, job descriptions and applications);
• contracts with third-party vendors who assist franchisees with human resources matters; and
• technology systems requirements or applications that involve labour components.134

If the answer to any of the above is yes, then those controls can be eliminated or at least limited.

For example, the following steps can be taken or measured:

• Making the intent not to be joint employers clear. Franchise agreements largely include an independent contractor provision. Language can be added explicitly stating that the parties are not and do not intend to be joint employers; the franchisee is the sole employer and as such retains the sole discretion and right over any employment matters at its independently owned and operated franchised location, including listing the essential terms and conditions of employment, and is therefore responsible for compliance with all applicable laws with respect to its employees, including all labour and employment laws.
• Indemnification and insurance. An indemnification provision in the franchise agreement that requires the franchisee to indemnify the franchisor for any claims or damages arising out of or resulting from the franchisee’s employment actions or omissions, including any costs incurred in opposing a joint employer claim, can help further clarify the parties’ intent that they are not joint employers. As an additional step, franchisors may consider requiring franchisees purchase applicable insurance to cover employment claims asserted by franchisees’ employees under which the franchisor qualifies as an additional insured.
• Operations manuals that are focused on trademark and brand standards. Franchise agreements typically require compliance with the franchisor’s operations manual. For that reason, the operations manual should focus on imposing requirements related to the standards exemplified by the franchisor’s trademark and franchise system, such as ensuring a standardised product and customer experience, but nothing employment-related. Additional material, including any suggestions related to employment the franchisor may want to provide, should be clearly framed as permissive language.
• Maintain template employment materials as optional. To the extent template employment materials (including employee handbooks and policies, job descriptions and job applications) are provided to franchisees, the use of those materials should be optional and language to that effect included in the templates. As an additional safeguard, franchisors may want to remove their name, trademarks and logos from any templates.
• Be careful about requiring workforce management technology or tools. Another area of scrutiny in the joint employer field is how franchisors direct the use by franchisees of specific technology and tools (including systems, software, applications and vendors) and may use those to track, set, or oversee employment terms and conditions. For example, a franchisor might have previously required franchisees to use certain labour scheduling software, a specific online hiring platform (or encouraged hiring through the franchisor’s website), or a designated vendor for payroll functions. There are ways franchisors can assist their franchisees without imposing unnecessary requirements. For example, the technology or tools can be made optional and a franchisor may even present several options for franchisees to explore and use at their own choosing.
• Train field and operations personnel to enforce only brand standards. The franchise relationship in practice must be consistent with the franchise agreement and other related documents that no joint employer relationship exists. Field and operations personnel should therefore be trained to enforce only the brand standards and avoid involvement in franchisees’ employment matters. Pre-opening training programmes and ongoing inspections should focus on franchisees’ compliance with required brand standards. The training of franchisees’ employees should be left to the control of the franchisees.
• Clear communication to third parties about franchisees’ independent business status. Language in the franchise agreement typically requires a franchisee to conspicuously identify its franchise as an independently owned and operated location to third parties. As part of this obligation, franchisees should take steps to communicate to their employees that even though the franchisee is part of a franchise system, it is an independent business and the employer is the franchisee, not the franchisor. For example, franchisees can include employer disclaimer language in all employment materials they provide to their employees and label all such materials with the franchisee’s name to avoid any misunderstanding that the franchisor is an employer.135

Ironically, the Australian approach to minimising joint employment liability for franchisors is in stark contrast to the US approach. The hands-on compliance training and monitoring called for in Australia would be likely to result in the imposition of joint employment liability on a franchisor in the United States.136

Beyond compliance training and monitoring, franchisors in Australia should include in both franchise agreements and operations manuals a strict requirement that franchisees must comply with all workplace laws.137 The franchise agreement should also detail the franchisor’s potential monitoring activities, specify consequences for non-compliant franchisees and require indemnification by the franchisee.138 This is particularly appropriate because the Franchising Code of Conduct does not permit a franchisor to immediately terminate a franchise agreement where a franchisee has violated workplace laws.139

Conclusion

The joint employment legal landscape is ever-changing. Enforcement actions and litigation are expensive, time-consuming and counterproductive to the franchisor–franchisee relationship. Franchisors and franchisees with national and international operations must continue to monitor developments in this area and take appropriate steps to conform their operations as needed. Given the risk and expense of joint employer liability, it cannot be understated that ‘[a]n ounce prevention is worth a pound of cure.’140