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Business Law: Business Franchises

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Lily Olsakovsky

on 22 April 2015

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Transcript of Business Law: Business Franchises

Franchise & Employment Law
Team Indigo
Lily Olsakovsky
Divya Kothandapani
Manik Panwar

What is a franchise?
A business model that involves one business owner licensing trademarks and methods to an independent entrepreneur.





Advantages for Franchisee (Investor)
1. Avoiding unnecessary trial and error period
2. Brand name is easily marketed
3. Minimizes potential risks

Disadvantages for Franchisee
1. Have to pay franchise fees and royalties to franchisor
2. Needing to abide by the franchisor's operating systems, standards, and procedures
Examples of well known franchises
McDonald's
Subway
UPS
Domino's
McDonalds versus National Labor relations board
In March 2015, McDonald's workers in 19 cities filed 28 health and safety complaints with Occupational Safety and Health Adminstration which allege that low staffing, lack of protective gear, poor training and pressure to work fast has resulted in injuries. The complaints also allege that, because of a lack of first aid supplies, workers were told by management to treat burn injuries with condiments such as mayonnaise and mustard.
U.S. Labor board named McDonalds as a 'joint employer' of the employees since it found that it wields enough control over its franchisees and it should be jointly responsible for the working conditions of their employees.
The complaints by the NLRB’s general counsel’s office, allege McDonald’s and certain franchisees violated rights of restaurant workers by making statements and taking actions against them for participating in nationwide protests and other activities to improve their wages and working conditions over the past two years.
Who employes the employees - the franchisor or the franchisee?
McDonalds Ruling complicates things.
McDonalds being named joint employer has a significant impact on the franchisor-franchisee relationship.
Sets precedent for future cases.
In the vast majority of cases, the franchisee owns the business. And the franchisee is therefore the employer, hiring people and firing people.
However, things get complicated when franchisor assumes substantial control over the franchisees operation.
Vicarious liability
Vicarious liability is a form of strict, secondary liability that arises under the common law doctrine of agency – respondeat superior – the responsibility of the superior for the acts of their subordinate, or, in a broader sense, the responsibility of any third party that had the "right, ability or duty to control" the activities of a violator.
When franchisor assumes substantial control over the franchisees local operations, then the franchisor may have vicarious liability.
The fact that the franchise agreement states that the employees are not employed by the franchisor is not enough.
If the franchise agreement gives the franchisor control over employees or operations, the franchisor can be held liable for the wrongful acts of franchisees.
Examples of substantial control
Direct involvement with HR issues. Common cases include franchisors requiring franchisees to adopt uniform employee handbooks or setting basic day-to-day employment policies.
Workplace harassment issues.
Franchisors getting directly involved with workplace investigations or instructing franchisee on what they should do in response to such an issue. At most, a franchisor may offer a recommendation or suggestion, but ultimately this issue must be resolved by the franchisee.
Interfering with Employees engaging in "Protected Activity" under the National Labor Relations Act. eg. Employees under the NLRA have certain rights to share information, sign petitions, and seek to improve their working conditions. A franchisor found trying to regulate any of these may be held liable.
Patterson v.s Domino's
In this case, an employee of a Domino's fast food chain, in California, was sexually harassed by one of the supervisors (hired by the franchisee).
The victim sued the franchisor, franchisee, and harasser.
The question:
Who is liable for the actions of the employee?
Over the past 50 years, the Court of Appeals has used "agency" terminology to decide upon cases regarding whether a franchisor should be held liable for torts committed by a franchisee or its employees.
In the appellate courts they focus on the
extent to which the franchisor is involved
in the actions of the franchisee or employee.
The franchisor has control over marketing and the enterprise, however the franchisee has the control over managing the daily operations in the stores.
Potential liability of franchisor:
If he or she has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee‘s employees.

Recent Developments in Franchise Employment Law
Can a franchise chain be held liable for the unlawful employment practice of one location?
Traditionally the answer would be “no” unless the chain participated in the practice.

However, recent charges by the National Labor Relations Board against McDonald’s USA, LLC, show that chains should expect further penalties for the acts of their franchisees.
In the past, courts have acknowledged that employment laws do not lump together a franchisor with its franchisee when the franchisee has engaged in unlawful conduct toward employees.

Recent developments show that the law is changing.

In 2014, the Service Employees International Union began a campaign against the McDonald’s restaurant chain entitled advocating for increased wages. The SEIU claimed that many franchisees responded by engaging in retaliatory conduct against participating employees. Based on these allegations, the General Counsel of the National Labor Relations Board (NLRB) has brought 78 Unfair Labor Practice (ULP) charges against McDonald’s USA, LLC, and McDonald’s franchisees.


In the State of California, the legislature passed a bill last year that would have strictly regulated the terms of a franchisor’s business relationship with its individual franchisees. The statute would have prohibited certain terms often imposed by franchisors, and limited their ability to end franchise relationships and prevent the sale of franchises to third parties.



With these recent developments, businesses involved in a franchise relationship (both franchisors and franchisees) should exercise increased caution regarding stricter franchise employment law issues.
The court held that Domino's pizza was not liable for the actions of the franchisee's employees because Domino's did not have control over the day to day actions in the workplace.
The franchise agreement did not give Domino's the right to control day to day actions.
Full transcript