Franchising

The changing landscape of employment and labor law poses numerous risks and challenges in the franchise world —both with respect to franchisor’s employees and the employees of their franchisees. Franchisors are frequently named as defendants in labor and employment cases and as targets by a number of government agencies such as the Department of Labor (DOL) and National Labor Relations Board (NLRB).  Our team of highly experienced attorneys works closely with franchise brands to combat the ever-increasing trend to attempt to hold them responsible for labor and employment matters that should not be their responsibility. 

Legal developments in the last decade, and in the last few years in particular, have put franchisors and franchisees on the cutting-edge of labor and employment law issues.  The following well-known examples underscore the many risks and challenges faced daily by franchisors:

• The NLRB is litigating against quick service restaurants (a/k/a “Fast Food” restaurants). The Board claims that franchisors have too much control over their franchisees’ staffing decisions and wages and, as a result, they should be considered the “joint employer” of the franchisees’ employees, obligating them to participate in the collective bargaining process.
• The DOL is investigating franchisor-franchisee relationships in a variety of industries, the commercial cleaning industry in particular, and examining under a six-factor test whether franchisees are truly independent business owners, or instead misclassified employees.  The DOL is also auditing the master franchise structure to determine if national master franchisors are part of a “joint enterprise,” and thereby jointly responsible for misclassification and any attendant minimum wage or overtime liability to the misclassified employees.
• State governments, most notably state agencies charged with administration of unemployment insurance funds, are auditing franchisors under their respective state laws to determine if franchisors must make back contributions for income paid to franchisees and reported to the government by IRS Form 1099 (and therefore without any withholdings or government contributions).  For franchisors with multiple franchisees, the back contributions owed, plus interest and penalties, can drive them to financial ruin.
• In lawsuits across the country, franchise owners (a/k/a “franchisees”) in a variety of industries, including the massage, convenience store and commercial cleaning industries, are claiming they are not actually independent business owners, but rather micromanaged employees of their franchisor. 
• In lawsuits across the country, employees of franchisees are seeking a deeper pocket (i.e., the franchisor who receives all of the royalty checks) to hold liable for their workplace woes. 

Why is all of this happening?  Primarily, it is because franchise laws (and trademark laws that apply to franchisors’ trademarks) require that franchisors exert “significant” controls over their franchisees in order to maintain their franchise status and to preserve and protect the franchise brand’s trademarks.  Government regulators are mistaking these controls for a blurring of the franchise lines, and therefore auditing whether the franchisor is truly a franchisor.  Additionally, disgruntled franchisees are feeling micromanaged and frustrated by these “significant” controls, and expressing their frustration through lawsuits alleging misclassification.  This tidal change in the way some franchise relationships are being viewed is occurring because of the view that franchised corporations are improperly seeking to decentralize operations and circumvent labor and employment obligations, particularly in the areas of wages and benefits.

Given these developments, it should be no secret that sound franchise management now more than ever requires a partnership with experienced labor and employment counsel.

What Sets Us Apart

Constangy, Brooks, Smith & Prophete, with offices across the country, has been representing the interests of corporations in all facets of labor and employment law since 1946.  The Firm has a dedicated group of experienced attorneys who have been representing the management-side interests of franchisor and franchisee clients alike for decades.  Our attorneys regularly collaborate with clients to respond to government investigations and challenge adverse governmental findings in administrative hearings and court proceedings.  We are constantly defending lawsuits in the misclassification and wage-hour areas of law, including against claims of joint employment.  The Firm’s expertise in defending lawsuits gives our attorneys unique insight into how best to proactively address problematic internal policies and practices that can lead to unwanted governmental investigation or litigation.

Representative Matters

• Defending franchisors and franchisees in government investigations by the NLRB and DOL in multiple jurisdictions
• Defending franchisors and franchisees when state governments seek back contributions for unemployment insurance funds
• Defending franchisors in class action and individual lawsuits alleging misclassification of franchisees as independent contractors
• Defending franchisors and franchisees in joint employer claims by employees of franchisees
• Defending franchisors and franchisees in wage and hour litigation alleging misclassification, minimum wage violations, unpaid overtime and missed meal breaks
• Auditing franchisors’ internal policies and practices to ensure compliance with wage-hour laws and labor laws and limit exposure to government investigations and lawsuits
• Providing franchisors and franchisees with advice pertaining to (i) immigration law, (ii) workers’ compensation law, (iii) compliance with Occupational Safety and Health (“OSHA”) regulations, and (iv) compliant state specific drug free workplace policies and forms
• Lobbying state governments for changes to franchise laws to shield franchisors from claims of franchisee-misclassification
• Our franchise industry attorney experience is further supported by more than 160 additional attorneys in our offices nationwide who represent thousands of non-franchised corporations facing the same or similar issues. 

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