Franchise 101: NLRB Out With the New; and Too Little Too Late
David Gurnick Selected to Best Lawyers
Congratulations to David Gurnick, designated one of the Best Lawyers in Southern California 2018 in franchise law by Best Lawyers Magazine, distributed with the Los Angeles Times. Selection for the honors are based on a survey of other attorneys practicing franchise law in Southern California. This is the sixth consecutive year David appears on the list.
FRANCHISOR 101:NLRB: Out With the New
On December 14, 2017, the National Labor Relations Board (Board) in Hy-Brand Industrial Contractors, Ltd., 365 NLRB No. 156 (2017) expressly overruled the divisive joint-employer standard adopted by Browning-Ferris Industries, 362 NLRB No. 186 (2015).
The Browning-Ferris decision departed from decades of precedent by issuing a new joint-employer test, holding that two entities could be joint employers based on a reserved right to control terms and conditions of employment. The decision provided no concrete guidelines for businesses to evaluate whether their specific relationships would result in joint-employer status. Under the Browning-Ferris standard, a franchisor that had indirect or potential control over employees of its franchisees through typical brand controls found in franchise agreements could be considered a joint employer of those employees.
Franchisors were gravely concerned about ramifications of Browning-Ferris on the franchise business model.
In overruling Browning-Ferris, the Board reinstated the prior joint-employer standard. Going forward, the Board clarified that one entity would be deemed the joint employer of another entity’s employees only if it exercised actual, direct control over “essential employment terms.” Potential or reserved control alone is no longer enough. Moreover, that control must be exercised in a manner that is not “limited and routine.”
While this decision is welcome news for franchisors, it does not eliminate the possibility that a franchisor will be found to be a joint employer with its franchisee and thus jointly liable for actions of the franchisee’s employees.
Franchisors should remain careful when drafting documents that set controls over franchisees’ employees, such as payroll practices, setting work schedules or disciplinary guidelines. After Hy-Brand, the mere fact that a franchisor reserves the right to exercise control over a franchisee’s employees will no longer mean joint employment exists, but if that right to control is frequently exercised, there might still be a finding of joint employment.
FRANCHISEE 101:Offer Too Little Too Late
A Florida federal district court found that a doughnut franchisee’s failure to pay royalties and other fees constituted a material breach of contract justifying termination, even though the franchisee expressed a willingness to pay.
The franchisee had been in the Tim Hortons’ system for a decade, and had operated this particular Tim Hortons franchise for over four years. On July 7, 2016, Tim Hortons sent the franchisee a breach notice for failure to pay monies owed. The notice provided that if amounts owed were not paid in full within five days of receipt of the notice, the franchise agreement would terminate on written confirmation.
The franchisee failed to pay by July 12, 2016 and Tim Hortons terminated the franchise agreement on July 13, 2016. That same day, the franchisee offered to pay the amount demanded in the breach notice and requested that Tim Hortons provide wire instructions to send payment. Tim Hortons rejected the offer and confirmed the franchise’s termination.
Following a bench trial, the court upheld Tim Hortons’ decision to terminate the franchisee for failure to pay monies owed. The franchisee argued that it was willing to pay the fees owed and asked Tim Hortons for wiring instructions.
The court found that an “offer to pay” was not the same as actual payment and in any event, the offer to pay came after the cure deadline. The court stated that, under Florida law, payment has not occurred until there is an actual “tender” of funds. A suggested willingness to send funds and a request for information on where to send was not equivalent to a tender of funds. The court concluded that the franchisee’s offer to pay was not a cure of its breach and Tim Hortons had the right to terminate.
This decision serves as a warning for franchisees. Franchise agreements often have terms that favor the franchisor and these terms are likely enforceable. Franchisees should evaluate the costs and benefits before entering into a franchise relationship and recognize that the risks are different from ordinary business risks associated with business ownership.