Franchisors Shouldn’t Micromanage Franchisees’ Compliance Training

Puzder’s nomination sparked questions of franchisors’ responsibility

Allen Smith, J.D. By Allen Smith, J.D. February 21, 2017
​Andrew Puzder has withdrawn from consideration to become the next Secretary of Labor. His nomination was controversial from the start. One concern critics had was the number of wage and hour and discrimination violations that had been found in his company's restaurants.

Puzder is CEO of CKE Restaurants, which owns Hardee's and Carl's Jr. restaurant brands. A spokesman for CKE Restaurants said that the company, as franchisor, complies with employment laws at corporate-owned stores. He told SHRM Online that no Fair Labor Standards Act violations were found within the handful of wage and hour cases at corporate-owned stores.

So what does that mean for stores owned by franchisees? What responsibility do franchisors have for ensuring that franchisees comply with employment laws?

Legal experts say franchisors have more control over franchisees' compliance than was suggested by the debate over Puzder's qualifications for labor secretary. But franchisors shouldn't micromanage franchisees' compliance efforts or else they risk being viewed by courts as joint employers liable in lawsuits brought by franchisee employees.

The wage and hour compliance record at CKE restaurants overall actually was pretty good, said CKE spokesman George Thompson.

"Bloomberg BNA found that, even including CKE franchisees—approximately 3,000 domestic restaurants—there were 56 WHD [Wage and Hour Division] investigations, the second fewest among the 20 restaurant chains surveyed. Of those 56 cases, 23 had no violations and 33 had no violations for back wages. There were zero willful violator investigations," he stated.

Why did he say "even including CKE franchisees," though? Isn't franchisees' record of compliance relevant? 

Yes, according to Sen. Elizabeth Warren, D-Mass. She stated in a Feb. 13 letter to Puzder, before the withdrawal of his nomination, "Your company's record of prolific labor law abuses and discrimination suits—the most of any major burger chain—gives me great pause given that as labor secretary you'd be charged with enforcing these very laws. Further, the painful first-hand accounts of these abuses by the workers in your company and its franchises that have surfaced since your nomination—including three accounts from workers I heard from in person at a public forum—should sound an alarm for every member of the committee and the Senate."

CKE's spokesman said that the Democrats' attacks on Puzder have been debunked. But the distinction between corporate-owned stores and franchisee compliance reflects a challenge for franchisors: How can they ensure franchisees don't violate the law without exercising so much control over them during training that they become joint employers?

Training Without Jeopardizing Status as Nonemployer

"Simply providing training to franchisees regarding employment law should not transform, by itself, a franchisor into an employer," said Bob Horton, an attorney with Bass Berry & Sims PLC in Nashville, Tenn.

But he cautioned, "During the course of employment law training, supervisors will often ask for advice regarding specific situations [e.g., what to do when discrimination complaints boil down to "he said/she said" disputes] that come to mind during the training. Responding to such inquiries during the course of training should certainly be avoided as those conversations could be used as evidence of indicia of control by the franchisor."

To avoid such awkward moments, a franchisor might choose instead to provide franchisees with pamphlets talking about best practices, noted Randy Coffey, an attorney with Fisher Phillips in Kansas City, Mo. In-person training can work too, but the more it comes across as a directive about how to conduct investigations when there is a claim of sexual harassment or a wage and hour violation, for example, the more risk there is of being seen as a joint employer by the courts.

Mark Kisicki, an attorney with Ogletree Deakins in Phoenix, said that franchisors' training of franchisees on legal compliance should be OK as long as it doesn't veer into business training. "I don't think legal training is a significant risk," particularly when it is on a Web-based platform, he said. That way it is "unambiguous as to exactly what was said."

He said that in recent years the definition of joint employer has expanded. Kisicki expects the definition to shrink under President Donald Trump's administration back to "more traditional notions of joint employment" where one entity's direct control of another business is relevant. Today, all that is required for joint employment to be established is indirect control.

Requiring that franchisees adopt specific compliance policies is problematic, while making a sample handbook available but not required is a gray area, he said.

Kisicki recommended focusing training on wage and hour issues, as these obligations differ from state to state.

[SHRM members-only platform: SHRM Connect]

A More Hands-Off Approach

While limited training is probably not enough to show joint employment, some franchisors may want to take a more hands-off approach. Franchisors should at least review and revise their franchise agreements to highlight franchisees' responsibilities and set a uniform tone for legal compliance in terms of brand standards, according to Sherri Affrunti, an attorney with Reed Smith in Princeton, N.J. 

"That said, franchisors should avoid stating standards in such ways that sound like workplace rules," she said. Instead, franchisors should clarify that franchisees will be solely responsible for making determinations for hiring, firing or other discipline measures; must comply with wage and hour and anti-discrimination laws; and are responsible for other employment conditions, including schedules and pay. 

She said franchisors should leave the franchisees to independently determine the means to meet the established standards when running their businesses. "Nonetheless, to protect themselves, franchisors should include appropriate indemnity provisions in their franchise agreements requiring franchisees to indemnify the franchisor with respect to the day-to-day personnel actions," she noted.

A franchisor might require its franchisees to obtain employment practices liability insurance to provide coverage against claims for employment discrimination issues. As a condition of coverage, insurers often require that franchisees publish compliant employee handbooks and regularly conduct nondiscrimination and harassment training, she noted.

Some insurance allows for consultation with the insurer if the franchisee is not sure how to deal with a situation. This removes the franchisor from the equation, Coffey said. "You don't want franchisees coming to franchisors if something comes up," he stated. Franchisors would be reluctant to step in and provide direct advice when a problem arises for fear of liability.

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