Additional Franchisor Liability From Franchisee Employees

Over the past several years franchisees have been claiming that they have employee based claims against the franchisor. This has been especially prevalent in the janitorial and other service based franchises. Now we are getting cases where employees of franchisees are making claims that they are employees of the franchisor in certain cases.

 

Generally franchisors have been able to say that they are a separate entity from the franchisee and therefore cannot be liable to employees of the franchisee. But recently in New York, employees of Domino's Pizza franchisees were able to amend their complaint against the franchisee employers to also include Domino's, the franchisor, for violations of the Fair Labor Standards Act and the New York Labor Law. This case is Cano v. DPNY, Inc.

 

While this case is still pending and the franchisor may not be held liable in the end, it is concerning that the court did not dismiss the amended complaint, as expected. Some of the reasons the court gave for not dismissing the amended complaint are based on the following actions by Domino's:

 

1) Domino's promulgated compensation policies and implemented them through the Domino's PULSE system which included tracked hours, wages and payroll records. These were submitted to the franchisor for review.

 

2) Domino's created management and operation policies and practices that were implemented at the restaurants by providing materials for use in training store managers and employees, provided posters and directions for employee's tasks and monitored that performance through required computer hardware and software.

 

3) Domino's developed and implemented hiring policies.

 

This is just one more reason for a franchisor to have their franchise attorney review their policies, including their operations manuals, to ensure that they are limiting their exposure to liability.

Franchisor Control and Liability Issues

One area of a franchise system that must carefully be examined by franchisors is the amount of control exerted over both franchisees and the franchise system. Courts are increasingly finding ways to impose liability on the franchisor for the actions or omissions of the franchisee. As a rule of thumb, a franchisor is able to exercise the amount of control necessary to protect the brand, goodwill, trademark and quality control of services and products. Overstepping this can lead to devastating consequences.

When examining the possibility of imposing liability on a franchisor, the courts look at both the franchise agreement and the actions of the franchisor. The greater the level of control in the day-to-day operations or the details of the franchisee’s business, the greater the likelihood of imposing liability on the franchisor. For example, becoming involved in the hiring and firing of a franchisees employees can lead to imposition of liability, dictating the exact method of how floors should be cleaned, at what times and with which products can lead to liability, as can having security cameras on the franchisee’s premises that the franchisor continually monitors.

There are generally three types of liability imposed: vicarious liability, liability in a co-employer relationship, and liability in that the franchisor acts as the actual business instead of the franchisee. For the last type of liability, the courts looks at whether a franchisee can and will reasonably and justifiably believe the franchisor actually controls the operations of the business, and not the franchisee.

Avoiding the above-types of liability and other possible liabilities requires a franchisor to make careful considerations. Clearly maintaining a level of control is a necessity in a franchise system. However, the issue of control and the imposition of liability will continue to be a litigated issue. Franchisors should exercise caution when expanding controls, and should speak with a qualified franchise attorney to help them understand if the controls exerted stay within the acceptable levels of control or if they carry with them the possibility of liability. 

Helpful Resources:

Franchisor Liability for Franchisee Actions

Liability and Facebook

According to Facebook’s “Facebook for Business” page[1], there are over 900 million people currently holding Facebook accounts. That is a staggering amount. It is no wonder that in 2011 it was estimated by ZNet.com[2] that nearly two-thirds of all small businesses had a Facebook page. Clearly Facebook is an advantageous marketing tool because the page itself is free and the advertising offered is relatively inexpensive when compared to the price to reach a similar market volume.

However, businesses should be aware of the potential liabilities created by having a Facebook page. Recent court decisions by the Advertising Standards Board in Australia demonstrate the liabilities created by allowing public comments to be made on a company’s Facebook page. Although the decisions are Australian-based, for those companies in the United States, these decisions provide guidance on what steps can be taken to prevent or at a minimum, limit, liability.

The Advertising Standards Board issued this opinion:

“A Facebook site of an advertiser is a marketing communication tool over which the advertiser has a reasonable degree of control and could be considered to draw the attention of a segment of the public to a product in a manner calculated to promote or oppose directly or indirectly that product… As a Facebook page can be used to engage with customers, the Board further considered that the Code applies to the content generated by the advertisers as well as material or comments posted by users or friends.[3]”

The advertising of US-based businesses, including franchises, is regulated and businesses should understand and be aware of the regulations and guidelines and make sure that they are complying in all their marketing and advertising –including on Facebook and other social media sites.

In July we posted a blog about what employers should know about social media policies (see http://tinyurl.com/83wt2ym). In order to help avoid liability from customer posts on a business’s Facebook page, the social media policies should include the manner in which the company plans to handle posts that have the potential to create liability, and these policies should be shared with employees and any outside parties that have access to or control your social media sites.

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[1] https://www.facebook.com/business/overview

[2] http://www.zdnet.com/blog/facebook/two-thirds-of-small-business-owners-use-facebook-for-marketing/1529

[3] http://www.lexology.com/library/detail.aspx?g=bcfa3cdc-cd11-404f-a3c5-a8f7dd0c5bba

Vicarious Liability and Franchisors

A rising concern for franchisors is being found vicariously liable for the acts of its franchisees. Previously, when a franchisor was sued, the franchisors could cite the fact that the franchisee’s business was “independently owned and operated” from the franchisor’s business to be removed from the lawsuit during summary judgment and escape being dragged into trial to determine liability. However, in the last 20 years courts have looked to the controls of the franchisor over the franchisee’s business to deny summary judgment and allow a jury to find the franchisor vicariously liable.

This leads the franchisor with the unclear position of trying to determine how best to keep its system uniform and protect its trademarks through controls and yet not cross over this hazy line to be found vicariously liable.

The nature of the franchise business is a long term relationship that needs uniformity and flexibility. To meet these objectives, most franchisors exercise controls through an operations manual. The courts not only look at the franchise agreement to determine liability, but they also look to the operations manual. This is a very broad test of control. The concern about such a broad control test is that almost every franchisor has very significant controls through their operations manual in order to maintain uniformity and protect their marks.

Recently, some courts have been more specific about the controls they look at to determine vicarious liability. The controls must be related to the matter that was the cause of the injury. Just because the franchisor gives guidance and controls over a majority of the franchisee’s business, that is not enough, unless the franchisor had the right to control the particular activity giving rise to the claim. Even if the franchisor gives direction and guidance regarding the direct activity that caused the injury, there may be some additional hope for the franchisor. In Ketterling v. Burger King Corporation the fact that Burger King’s operations manual specifically stated that the franchisor did not have control over the day to day operations of the franchisee made the court find that the franchisor could not be vicariously liable and allowed summary judgment.

When drafting an operations manual, the franchisor should consider the following:

1)         Does the control lead to an obvious potential vicarious liability claims? If so, consider the following question.

2)         Are the controls necessary for protecting the franchise system and trademarks? If not, the franchisor may not want to include such controls. If so, the franchisor should consider the following question.

3)         Does the operations manual clearly and concisely state that the franchisor does not control the day to day operations of the franchise business? If not, the franchisor should include this in the operations manual and in the franchise agreement.

A Primer on What Employers Should Know About Social Media Policies

In its third report of 2012, on May 30, 2012, the National Labor Relation’s Board (“NLRB”) further narrowed the scope of what would be construed as an acceptable employee social media policy. If you are an employer and want to restrict your employee’s social media use, you will want to read the Report (found here: NLRB May 30Report –click 'Operations Management Memo'). This latest report clarifies how various policies can be found to limit an employee’s Section 7 rights (read the National Labor Relations Act here) and are therefore unlawful.

The basic rule derived from the various NLRB reports is that an employer will be liable for social medial policies and rules that “would reasonably tend to chill employees in the exercise of their Section 7 rights.” However, if your social media policy provides rules “that clarify and restrict their scope by including examples of clearly illegal or unprotected conduct, such that they would not be reasonably construed to cover protected activity, [the rule is] not unlawful.”  

Essentially, three main points were made in the May 30 report:

1.   Do not be over-broad in your policies. Be specific. If you do not want employees sharing personal information of other employees, be sure that you are not limiting the employee’s right to discuss labor conditions, salaries and wages, etc.

2.  Give clear examples. Tell your employees what type of conduct is not allowed (i.e. discriminatory, harassing, obscene, malicious, threatening, disparaging, etc.). If you do not want confidential information to be disclosed to the public, tell your employees specifically what type of confidential information is included. Remember, it cannot include those items that are covered by the Act.

3.   General disclaimer or “savings clause” does not cure the over-broad portions of a social media policy. In other words, if your policy is full of over-broad policies and you fail to give limiting examples and clarifications, your statement that the policy will be administered in compliance with all applicable laws and regulations, will not overcome the problems.

The Report gives several examples of poorly written policies and why they were found unlawful. However, it also gives employers the opportunity to view a policy that was found to be compliant with the act. Wal-Mart’s policies were found to be in compliance and are provided for readers starting at page 22 of the Report.

If you are writing or revising your employee manual’s social media policy, make sure that you reference the NLRB reports. And ask yourself if your policy leaves any question as to whether or not such lawful activities such as discussions on wages, working conditions, labor unions, etc. are somehow restricted.

This blog post is not meant to be an in depth examination of your duties and responsibilities as an employer in formulating a social media policy. Nor is it meant to cover all examples of how to avoid liability. You should discuss your social media policy with a qualified attorney or other qualified resource.