Employment Law and the Franchisor Dilemma

 

The reason is simple: vicarious liability. 

 

If the franchisor overreaches and actively controls the employee relationship, between franchisee and employee, then the franchisor might be liable under the legal theory of vicarious liability. 

 

If on the other hand, the franchisor does nothing, then at the very best, the franchisor may be complicit in allowing a violation of employment law.

 

At the Foley & Larnder LLP website, there is a nice explanation of the franchisor's dilemma.

 

 "In Myers v. Garfield & Johnson Enterprises, Inc., et al., 2010 U.S. Dist. LEXIS 3468 (E.D. Pa. January 14, 2010), a federal district court in Pennsylvania held that defendant Jackson Hewitt, Inc., the franchisor of co-defendant Garfield & Johnson, was potentially liable under Title VII of the Civil Rights Act of 1964 for sexual harassment allegedly committed by Garfield & Johnson managers. 

 

Rejecting the franchisor's motion to dismiss for failure to state a claim, the court held that plaintiff's joint-liability theory was plausible enough to proceed to discovery. 

 

What is particularly bracing about the court's analysis is its recognition that these factors could trigger potential employer liability for the franchisor even though they were, in many cases, typical of the control exercised in any franchisor/franchisee relationship. 

 

The court said that if the standards for control and authority derived from common law principles for application in the Title VII context were met, the fact that they arose between a franchisor and franchisee and reflected the type of control that almost all franchisors exercise would not insulate the franchisor from liability.

 

Because the joint employer and agency tests involve multiple considerations with no single factor dispositive, it is not clear that any single contractual or operational step (short of drastically limiting the degree of control over franchisee operations that most franchisors feel is essential) could foreclose the potential for liability under this court's view of the law. 

 

Taking the decision at face value, it could be argued that, under Myers, franchisors find themselves between a rock and a hard place: 

 

The more closely they monitor franchisee employment practices, the greater the risk of their being subject to Title VII liability for the franchisee's wrongful behavior. If they eschew monitoring of that behavior, they may be subject to Title VII liability anyway under other elements of the applicable tests, and will not be in a position effectively to regulate conduct that could result in statutory violations. 

 

On the other hand, if they do monitor the behavior and then take draconian measures in response to franchisee violations, they may trigger liability under state dealership or franchise protection statutes."

 

So how does the franchisor both monitor to regulate the conduct, but not monitor so closely as to become vicarious liable, under common law or statute? It is a very difficult compliance problem for franchisors. 

 

One suggestion made by Michael Bowen is that the franchisor: