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If a recent bill passed by the Ohio House and Senate is signed into law, franchisees across the state may want to double check their compliance with local wage, labor, tax and certain other local laws. In mid-December, both sides of the Ohio legislature passed House Bill 494, a bill which specifically exempts corporate franchisors from franchisee-level labor and pay-related violations. Because of the traditional structure of the franchise business model, this bill could have a direct impact on the potential liability of both franchisees and franchisors in Ohio going forward. 

As is typical across the franchise industry, many franchise businesses are set up such that a corporate franchisor provides the national standards for marketing and managing a franchise business, and the local franchise owner typically directs the pay, sets hours, hires employees, and deals with local tax and workers compensation issues in compliance with local law. Sometimes, however, a franchisor may set higher standards for its franchisees to meet than local laws require, or a franchisor’s national standards may require a franchisee to frequently cut corners in order to comply with both the local law and the franchisor standard. Because of the way in which both the franchisor and the franchisee determine the structure of the franchised business, many franchisees and franchisors are often concerned about being held liable for the other’s violation of labor laws, or being found to be a joint employer. 

Ohio House Bill 494

HB 494 Bill was introduced in part because of the uncertainty surrounding the national joint employer standard – the standard that determines whether one company is a joint employer, and whether it can be held accountable for another related company’s employees due to certain factors. In December 2017, in an opinion titled Hy-Brand Industrial Contractors, Inc., the National Labor Relations Board overruled its own joint employer standard in Browning-Ferris Industries, 362 NLRB No. 186 (2015). Browning-Ferris held that two entities could be found to be joint employers if one entity merely reserved the right to exercise control over another company’s employees, or indirectly exercised such control. Although the Hy-Brand decision reversed the Browning-Ferris standard, the Hy-Brand opinion was itself overturned due to a conflict of interest in March 2018, and the Browning-Ferris standard still stands. To address the uncertainty about the standard outside of NLRB opinions, however, the NLRB instituted a rule-making process about the joint-employer standard in the early summer of 2018. The NLRB recently finished accepting comments on the standard from across the country, and this process is expected to be finalized in the first quarter of 2019.

Impact on Ohio franchise businesses

Because of this state of flux on the national level, the impact of HB 494 for Ohio franchise businesses is potentially substantial. The bill changes the definition of “employer” to include a “franchisor with respect to the franchisor’s relationship with a franchisee or an employee of a franchisee, unless the franchisor agrees to assume that role in writing or a court of competent jurisdiction determines that the franchisor exercises a type or degree of control over the franchisee or the franchisee’s employees that is not customarily exercised by a franchisor for the purpose of protecting the franchisor’s trademark, brand, or both.” 

However, the bill also specifically excludes franchisors from the list of employers that could be held liable for a local business’ violation of state labor laws and other similar laws, unless “the franchisor agrees to assume that role in writing, or a court of competent jurisdiction determines that the franchisor exercises a type or degree of control over the franchisee or the franchisee’s employees that is not customarily exercised by a franchisor for the purpose of protecting the franchisor’s trademark, brand, or both.” 

This means that if HB 494 is signed into law, a franchisor could therefore not be held responsible for a franchisee’s violation of a number of state laws unless it expressly agreed to take responsibility, or a court found that the franchisor was exercising an out-of-the-ordinary level of control over the franchisee. The state laws that HB 494 addresses include Ohio’s Minimum Fair Wage Standards Law, the Bimonthly Pay Law, the Workers’ Compensation Law, the Unemployment Compensation Law, and the Income Tax Law. 

The Ohio Hotel & Lodging Association, the Ohio Restaurant Association and the Ohio Chamber of Commerce all supported the bill and lobbied in favor of it; however, Policy Matters Ohio testified against the bill. During hearings on the bill, Hanna Halbert of Policy Matters Ohio stated that the bill would “put workers and small-business franchisees at a real disadvantage” because it “would limit when corporate franchisors could be found jointly liable with franchisee operators when corporate systems or policies violate employee protections.” 

More than a dozen similar laws like HB 494 are popping up in states across the country. With the uncertainty surrounding the national joint employer standard, it remains to be seen how much of an impact HB 494 and other similar state laws will have on local franchisees – especially if state and national standards conflict after the NLRB rule-making process is complete. Next, HB 494 is scheduled to go to the governor for signature, which will likely occur in early 2019. 2019 will certainly bring headlines on both the local and national level for franchisees and franchisors facing potential liability due to a related business’s potential violations of labor laws. 
 
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