States Protect Against Joint Employer Liability; and Combatting Franchisor’s Harmful New Policies
Barry Kurtz in The Business Journals
“…Is the business sustainable in the marketplace? To be sustainable, the business concept should be unique enough to withstand competition, and also…”
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IFA Legal Symposium
Barry Kurtz, David Gurnick and Tal Grinblat attended the International Franchise Association’s 49th Annual Legal Symposium in Washington D.C. The conference provides an opportunity to gain insights into many of the legal challenges faced by franchisors around the world. This year’s symposium featured Philip Miscimarra of the National Labor Relations Board, who spoke on the NLRB’s recent decisions regarding joint employer liability.
State Bills re Franchisor Joint Employer Liability
With franchisors deeply concerned about joint liability for franchisee employees, more states are passing laws trying to prevent that from happening. Here are some states and measures that have passed:
Texas enacted Senate Bill 652, providing that: “[A] franchisor is not considered to be an employer of: (1) a franchisee; or (2) a franchisee’s employees.”
Michigan passed House Bills 5070 – 5073, stating: “[A]s between a franchisee and franchisor, the franchisee is considered the sole employer of workers for whom the franchisee provides a benefit plan or pays wages.”
Utah passed House Bill 116, stating, “[A] franchisor is not considered to be an employer of: (i) a franchisee; or (ii) a franchisee’s employee.”
Wisconsin enacted Act 203 stating: “[A] franchisor … is not considered to be an employer of a franchisee … or of an employee of a franchisee.”
Indiana approved House Bill 1218, which provides: “a franchisor … is not considered to be an employer or co-employer of: (1) a franchisee … or (2) an employee of a franchisee.”
Georgia enacted Senate Bill 277, providing: “[N]either a franchisee nor a franchisee’s employee shall be deemed to be an employee of the franchisor for any purpose.”
The Virginia legislature attempted to pass House Bill 18, stating that “[N]either a franchisee nor a franchisee’s employee shall be deemed to be an employee of the franchisee’s franchisor.” But, the governor vetoed the bill.
These state laws will not protect franchisors from all claims. For example, various claims based on federal law may not be affected. But passage shows which states are friendlier to franchises and want to retain and grow their franchise industries.
What to Do About Franchisor’s Harmful New Policies
Franchisees aren’t always excited when their franchisor introduces a new policy. But if a new policy overreaches and might doom a franchisee’s business, can it be stopped before it starts?
Automotive Technologies, Inc. (“ATI”) is the franchisor of “Wireless Zone” stores. These stores sell Verizon Wireless cell phone products and services. The franchisor, ATI, received sales commissions from Verizon that it passed on to franchisees who made the sales. ATI also paid performance incentive payments (“PIPs”) to franchisees when they sold certain phones. When ATI announced it would stop paying the PIPs or start taking a 5% royalty from commissions before passing them on, a group of franchisees sued. They claimed the new policy was a breach of contract, unjust enrichment, and unfair practice, and asked the court for a preliminary injunction to stop the new policy.
The court ruled that to immediately stop ATI from applying its plan, the franchisees had to show they would be irreparably harmed – that is, they would lose “substantially all of their businesses.” Based on financial information from the franchisees, the court found they could suffer no more than a 2% loss of revenue from ATI’s new policy, and were not at risk of losing their businesses. The court denied the preliminary injunction.
Franchisors and franchisees may disagree on what is best for a franchise system, and the wisdom of a particular course may be known only in time. The case shows that franchisees must meet a high bar before a court will cut off a proposed new policy implemented by the franchisor in good faith.