Joint employer and agency exposure in the franchise relationship

Careful planning, disclosure, drafting and implementation of policies can help prevent exposure to joint employer and agency liability in the franchise context. 

In an Aug. 22, 2018, decision denying a franchisor’s motion to dismiss claims asserting the franchisor was either a joint employer with the franchisee or the agent of the franchisee, the United States District Court, Middle District of Pennsylvania, succinctly laid out the minimum pleading requirements to maintain a Title VII (hostile work environment) lawsuit asserting joint employer or agency liability in the franchise context.  

Importantly, the court also noted that there is little judicial precedent in the area and advised that there is a clear distinction between the minimum pleading requirements necessary to bring a hostile work environment case and the proofs necessary to win a lawsuit. The court allowed the claims to remain because the plaintiff’s lawsuit stated that the franchisor asserted some control over the employment relationship.  

The court’s decision evidences the need for clear delineation between the roles of franchisor and franchisee as well as the need to pay particular attention to the little details, such as a generic use of a franchise system trade name without indication of a franchise relationship.

KEY FACTORS IN THE COURT’S DECISION

Some keys factors in the court’s decision to allow the claims to stand were:

• The use of “forms” which did not make distinctions between the franchisor and franchisee or clearly identify that the employee was only working for the franchisee.
• Franchisor mandated training solely provided by the franchisor.
• Franchisor imposed employee policies and procedures on franchisees and its workers, without giving discretion to the franchisee.
• The franchisor’s right to review and audit the franchisee’s books and records. 

In its ruling the court stated a joint employment relationship exists when “one employer while contracting in good faith with an otherwise independent company, has retained for itself sufficient control of the terms and conditions of employment of the employees who are employed by the other employer.” A joint employer relationship exists for the purposes of Title VII when “two entities exercise significant control over the same employees.” 

Courts consider three factors in determining whether a joint employer relationship exists. No single factor is dispositive, and a weak showing of one factor may be offset by a strong showing on the other two factors.

1. Authority to hire and fire employees, promulgate work rules and assignments, and set conditions of employment, including compensation, benefits, and hours. 
   As the court noted, while the allegations did not establish that the franchisor had control over hiring and firing decisions, there were facts sufficient at that stage in the litigation regarding the franchisor’s authority to set conditions of employment and work place rules.
2. Day-to-day supervision of employees, including employee discipline. 
   An amended complaint contains some facts pertaining to the second factor that courts consider when determining whether a join employer relationship exists, i.e., day-to-day employee supervision. The plaintiff alleged that at the outset of her employment she was required to undergo a series of computerized training courses authored by the franchisor. The plaintiff further avered that the franchisor provided continual in-service training of employees. And, the franchise agreement authorized the franchisor to conduct periodic inspections and to provide “as it deems advisable, periodic and continuing advisory assistance to franchisee as to the operation, merchandising, and promotion of the restaurant.”
3. Control of employee records, including payroll, insurance, taxes, and the like 
   This third factor considers a franchisors control of employee records. Under the franchise agreement in question, the franchisor is required to provide the franchisee with reporting forms for use in operation of the business. The franchisor also has the right to examine “the books, records, and tax returns of Franchise,” which can be plausibly read to mean that the franchisor exercised some control over employee records for purposes of a motion to dismiss. 

The plaintiff in this case also alleges that she signed a policy referring to an employment relationship without designating the employer. 

In sum, while the plaintiff may ultimately be unable to establish joint employment after discovery, she has pled enough facts to state a plausible basis to find that the defendants were her joint employer. The court found that dismissal of the claims against the franchisor were not warranted. 

Agency Theory of Liability

Franchisors often contend that the claims against them cannot proceed on an agency theory of liability. An employee may be considered ‘employed’ by a third party as well as by the nominal employer if the third party has a right to control the employee’s conduct, either directly or through the third party’s control over the employer. Whether the control retained by the franchisor is sufficient to establish a master-servant relationship depends in each case upon the nature and extent of such control as defined in the franchise agreement or by the actual practice of the parties.