Learn about the direct and indirect risks of joint employer liability for franchisors, and find out how to limit your brand’s exposure.
In the highly regulated world of franchising, joint employer liability is a legal issue that’s perpetually on the radar of franchisors and franchise attorneys alike.
From seemingly inconsequential franchisee mistakes like overtime errors and missed breaks to more perilous violations like discrimination and unsafe work environments, joint employer liability can result in serious legal and financial ramifications for franchisors – even in situations where they had no direct involvement in a franchisee’s actions. As legislation regarding joint-employer status continues to evolve, including new federal rules taking effect this winter, knowing how to limit liability is as timely as it is critical for today’s franchisors.
In this guide, we’ll explore ways franchisors can manage the risks of joint employer liability, including strategies for limiting legal exposure and engaging more deeply with franchisees to prevent potential liability issues before they occur.
What is Joint Employer Liability?
Joint employer liability is a form of legal liability that can arise when the relationships between two or more business entities and a group of employees meets the legal conditions necessary to create joint employer status.
According to the National Labor Relations Board’s Joint Employer Standard 2023 Final Rule, which will take effect on December 26, 2023, two or more entities might be considered joint employers under the National Labor Relations Act if each entity “has an employment relationship with the employees, and if the entities share or codetermine one or more of the employee’s essential terms and conditions of employment.”
The expanded 2023 NLRB rule lowers the threshold for determining joint-employer status at the federal level by recognizing both reserved control and indirect control over essential terms and conditions of employment. Under the 2023 NLRB Standard for Determining Joint-Employer Status, those conditions include:
Benefits, wages and other compensation;
Scheduling and working hours;
Rules and instructions guiding the “manner, means and methods” of duty performance (including grounds for disciplinary action);
Employment tenure (including hiring and discharge);
Duties performed and their assignment;
Safety and health-related working conditions for employees; and
Supervision of performed duties.
According to the NLRB, “the joint employer standard is only implicated if an entity employs the workers at issue and has authority to control at least one of these terms or conditions. Authority over other matters is not sufficient.”
How Does Joint Employer Liability Apply to Franchisors?
Joint employer liability can apply to franchisors when their relationship with franchisees and franchisees’ employees meets the legal definition of a joint employer under the NLRB’s most recent joint employer standard.
“The concept (of joint employer liability) is that, in theory, a franchisor can be liable for the employment acts, labor and wage violations of a franchisee. And in many ways, this undoes centuries of contract law,” says Charles N. Internicola, a franchise attorney with over 25 years of experience and the founder of The Internicola Law Firm.
Because the standards for determining whether joint-employer status applies to franchisors can vary depending on the goals of the elected officials in office at any given time, regulations governing joint employer liability in franchising can sometimes be political in nature.
“At the NLRB and state levels, politicians are looking for a way where they can hold the franchisor liable. Thus comes the creation of joint employer liability, saying that a franchisor can be liable for franchisee actions, even though they're independent companies,” Internicola says.
Regardless of shifting regulatory agendas, though, understanding how joint employer liability can apply to franchise systems is critical for franchisors when it comes to protecting a brand from future legal issues.
How to Manage Joint Employer Liability Risks as a Franchisor
To manage the risks associated with joint employer liability, franchisors should understand when the joint employer standard might apply to their franchise system – and then take steps to avoid those conditions.
Typically, situations where joint employer liability might apply to franchisors include a range of actions where a franchisee has either intentionally or unintentionally violated labor law or employees’ civil rights. Common examples include, but are not limited to:
A franchisee failing to correctly pay overtime to workers;
Discrimination in a franchisee’s hiring practices;
A franchisee improperly managing employee breaks;
Hazardous working conditions created by franchisee negligence; and more.
“(A plaintiff) comes to hold the franchisee accountable, and what they would look to do is bring the franchisor into that process because presumably, the franchisor is a bigger business that has more money and would want to settle a claim faster, whatever type of claim that might be, because it's going to be more expensive for them to defend it,” explains Luke Fryer, CEO of Harri, a software company that offers talent attraction, workforce management, employee engagement, and compliance technologies for service-based businesses.
To mitigate those risks, franchisors should utilize industry best practices to avoid getting pulled into lawsuits brought against franchisees by franchisees’ employees as joint employers.
Strategies to Limit Franchisor Exposure to Joint Employer Liability
To limit exposure to joint employer liability, franchisors can take strategic action to restrict all decisions related to employee management – including hiring, firing, and disciplinary decisions – to franchisees.
“The franchisor playbook, for the longest time, has been to avoid creating conditions where a joint employer relationship could be established by a plaintiff,” Fryer says.
Although interpretations of joint employer relationships can vary at federal and state levels, some common strategies for limiting joint employer liability as a franchisor include:
Employee relationship clauses. Franchisors should consult with a lawyer about including a clause in their franchise agreement and other franchisee documents that specify the franchisee is solely responsible for managing their employees, including legal compliance and decisions related to hiring, firing and disciplining workers.
Omission of employee relationship items in operations materials. When creating an operations manual or other documents related to franchisee operations, franchisors should avoid providing instructions related to employee management or other employee-related matters, including hiring and firing.
Joint employer statements. In consultation with a franchise attorney, franchisors should consider including joint employer statements in their franchise documents specifying that no joint employer relationship exists between the franchisor and franchisee.
Avoiding conditions that create joint-employer status. Franchisors should work with an experienced franchise attorney to avoid creating any conditions that might imply a joint employer relationship with franchisees.
As a franchisor, it’s important to work with an experienced franchise attorney to build a rock-solid legal foundation. By taking the time to understand the regulations and risks associated with joint employer liability, franchisors can limit their legal exposure while ensuring franchisees are supported in their daily operations.
Direct Risks of Joint Employer Liability for Franchisors
For franchisors, the best strategy for mitigating liability is taking a proactive and strategic approach.
“From a franchisor’s perspective, just imagine a world where joint-employer (legislation) actually kicks in and gains traction. The first thing you want (is) each and every one of your franchisees and their employees operating in a compliant way every day. You need to understand what's happening from a workflow perspective – you want to have data that tells you what's going on,” Fryer says.
Noting the importance of harnessing technology to help franchisees comply with intricate labor laws that might be challenging to navigate on their own, Fryer says specialized software like Harri can help franchisors get proactive about limiting exposure.
By collecting critical compliance data from franchisees, Fryer says franchisors can get a clearer picture of the risks they face – and develop custom solutions to mitigate them.
“You're going to need to be very much aware of not having the ability to run reports from a year ago as to what went wrong. And you have to get proactive through aggregating relevant data into a live view of the risk of what's going on,” Fryer says.
Indirect Risks of Joint Employer Liability for Franchise Systems
Beyond the direct risks of joint employer liability, franchisors also face indirect risks including the potential for a more complex regulatory system as the concept gains popularity among lawmakers.
Pointing to recent legislative proposals in California, New York, Virginia, Massachusetts and Connecticut, Fryer says joint employer liability is something franchisors should pay attention to.
“None (of the state-level proposals) have made their way through – and I think for the health of the franchisor-franchisee model, it’s important that they don't – but it is certainly something that there are particular forces at play that are really pushing hard,” Fryer cautions.
Engaging with Franchisees while Limiting Joint Employer Liability
To ensure franchisors are prepared for whatever the future brings, finding ways to engage with franchisees without directly managing employees is another important strategy for limiting exposure.
“Employee retention is a leading indicator of business health. You can directly correlate employee retention to both revenue and unit-level EBITA with a fairly high degree of accuracy,” Fryer says, noting the importance of utilizing technology to determine employee sentiments and needs as a franchisor.
By taking the time to gather information and understand the needs of franchisees and their employees, franchisors can engage with franchisees to make sure everyone in the franchise system is properly supported – even without managing employees directly.
“The whole concept of effective systemwide communication within the franchisor landscape is very underserved, very fragmented. And what we want to be able to do is deliver,” Fryer says.
To learn more about Harri, visit www.harri.com.
