Joint Employer Liability

One of the recent concerns for both franchisors and franchisees in the US has been the uncertainty created by regulatory efforts to have franchisors held liable as a “joint employer” of the employees of their franchisees. Most prominent of these efforts has been the National Labor Relations Board’s (“NLRB”) actions asserting that McDonald’s is a joint employer of its franchisee’s employees. This concern has arisen because of the change in the 40-year old standard applied by the NLRB for determining when a joint employer relationship exists, including the possibility that a finding of joint employer status can occur even if there is “indirect” control by the franchisor, and even if this possible indirect control is not exercised. Considering that a standardized consumer experience is the primary goal of franchised systems, and that indirect controls are common in franchise operations, the risks to the franchise model are obvious.

The Michigan Legislature Steps In

Michigan has taken steps to limit franchisor exposure by amending its statutes to provide that a franchisee is the sole employer of the workers paid by the franchisee or to whom a franchisee provides a benefit plan unless the franchise agreement provides to the contrary. The amendments to the Michigan Franchise Investment Law (MFIL) were part of six bills passed and signed into law to clarify the status of franchise employees. The bills also modified the definition of the term “employer” in the Michigan Employment Security Act, the Workforce Opportunity Wage Act, the Michigan Occupational Safety & Health Act, and the Payment of Wages and Fringe Benefits Act. These amendments include a provision in the Michigan Worker’s Disability Compensation Act excluding joint employer status unless “(t)he franchisee and franchisor share in the determination of or codetermine the matters governing the essential terms and conditions of the employee’s employment” and “…both directly and immediately control matters relating to the employment relationship, such as hiring, firing, discipline, supervision, and direction.” The amendments to the MFIL and the Worker’s Compensation Act were effective on March 22, 2016. The effective date for the other statutory changes is May 23, 2016.

Things to do now:

1. Michigan franchisors should consider amending their franchise agreements to clearly provide that the franchisee is the sole employer of the workers that the franchisee pays or to whom they provide benefits to the maximum extent permitted under Michigan law.
2. All franchisors should review their franchise agreements and consider removing any provisions that are unnecessary or that may result in a finding of indirect control over franchisee employees. This is particularly important with respect to the employment relationship or the day to day activities of the franchise employees.
3. Franchisors should also review their operations manuals and documents that they provide to franchisees to remove any “mandatory” compliance language for issues that are not essential to the business model. Franchisors should also avoid directing franchisees or franchise employees or engaging in any course of dealing that could support a finding that the franchisor has “indirect” control over the franchisee’s employees.
4. Franchisors should consult legal counsel familiar with the intersection of employment law and franchise operations to assist with document review and protective measures in order to limit liability.