The Buck Stops … Where? Understanding Co-Employment

In 2016, New York State Attorney General Eric Schneiderman petitioned the state’s Supreme Court, alleging that Domino’s Pizza was a joint employer and therefore liable for “systematic underpayment” of employees at three franchises. Schneiderman says Domino’s violated New York’s Franchise Sales Act by requiring franchisees to use software known to under-calculate  wages. The franchisees settled in 2017, but Domino’s Corporate remains the sole defendant. Schneiderman claims “Domino's was heavily involved in the employment practices of the three franchisees and, as a result, is a joint employer of the workers at the franchisees' stores and is responsible for underpaid wages to these workers,” reports Long Island.com.

States have different franchise laws and joint employment tests, but under current National Labor Relations Board (NLRB) rules, joint employment could grow nationwide.

In joint employment an employee and their day-to-day work conditions are controlled by two or more companies. And workplace violations, such as Title VII or ADA noncompliance or missed overtime, become the responsibility of both companies. As Jon Hyman says in Workforce Magazine, “it’s what would hold a franchisor liable for the wrongful acts of its franchisee, a contractor for its sub and a business for its staffing company.”

Big Changes with Browning- Ferris

Beyond franchisees and subcontractors, joint employment effects home health care, construction, agriculture, janitorial, warehouse and logistics, staffing (especially for HR and payroll work) and hospitality companies.

In 2015 the NLRB broadened the scope of joint employment with its Browning-Ferris Industries of California decision. The board said reserving the right to directly control employees, even if you don’t exercise that control, is sufficient for joint employment. The decision was reversed briefly in December 2017 with the Hy-Brand Industrial Contractors decision, but then Hy-Brand was vacated in February 2018. And so, Browning-Ferris stands.

Now companies are taking steps to avoid any appearance of joint employment. “A franchisor that used to provide software that it used to provide payroll to its franchisee decided to no longer provide that software, operating manuals, best practices, things that they used to freely share,” Jeff Hanscom of the International Franchise Association  says on Bloomberg’s Payroll Blog.

The Save Local Business Act

Passed by the House in November 2017, the Save Local Business Act is now in the Senate. The bill gives franchisees control over, and full responsibility for, their business and employees. It says joint employment only exists if a franchisor “directly, actually, and immediately, and not in a limited and routine manner, exercises significant control over the essential terms and conditions of employment.” Some states have enacted similar legislation. The bill applies to franchisors and franchisees; but many businesses are playing it safe anyway.

Supporters like Cincinnati-based Buffalo Wings & Rings executive Philip Schram argue “there is a big difference between respecting brand standards, which each franchisee is expected to do, and in being instructed on the details of running your own individual business.”

They also argue that Browning-Ferris hinders franchisors’ support for their franchisees with things like training materials, handbooks or software. “Franchisors are becoming less and less likely to provide a level of assistance for fear of triggering the joint-employer test,” says Hanscom.

But those opposed to the bill say it leaves franchisees on the hook, even if they are following corporate policy. “The larger corporate franchisor cannot be held jointly liable for paying the workers their unpaid wages, even in cases where the franchisor was partially responsible for the violation,” according to the Economic Policy Institute.  In absolving franchisors of liability, the bill removes their incentive to stop violations.

Managing Your Risk

To minimize risk, learn the employment laws in your state or any state in which you have employees or franchisees.

Examine franchise agreements for language stating franchisees’ responsibilities regarding hiring, firing, wages and working conditions. In a 2017 victory for franchisor 7-Eleven, a Federal court in California ruled against franchisees and said 7-Eleven is not a joint employer because its franchise agreement clearly states franchisees, not 7-Eleven, “exercise complete control over and all responsibility for all labor relations and the conduct of [franchisees’] agents and employees, including the day-to-day operations.”

Franchisors and franchisees should remember these suggestions from QSR Magazine:

• The franchisee is the boss for major decisions (i.e. screening, hiring, firing, employee discipline, wages and work conditions)
• Corporate training is reserved for franchisee management; employee training happens at franchise level
• Franchisees create employee handbooks
• Franchisees choose scheduling and timekeeping software
• Brand standards (i.e. food appearance, product display, etc.) are not presented or interpreted as company rules

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