Labor & Employment Law Section

By Laura J. Wetsch

In July 2016, and again on Dec. 14, 2016 (during the fourth special session ostensibly called to deal with HB2), N.C. House representatives introduced bills to statutorily exempt franchisors from responsibility and liability regarding North Carolina’s wage and hour, OSH, Workers Comp, and unemployment insurance requirements. The proffered language created a new statute (N.C.Gen.Stat. § 95-25.24A) providing,

“Neither a franchisee nor a franchisee’s employee shall be deemed to be an employee of the franchisor for any purposes, including, but not limited to, this Article and Chapters 96 and 97 of the General Statutes. For purposes of this section, “franchisee” and “franchisor” have the same definitions as set out in 16 C.F.R. § 436.1.”

The bill did not pass, but on Thursday, March 23, 2017, a N.C. House committee added the same language to SB131, a bill that had already passed through the Senate and otherwise dealt with motley issues (mortgage servicing fees, private well permitting requirements, exemptions to energy efficiency requirements, protecting personally identifiable information from public disclosure, lessor billing for water/sewer charges, zoning amendments, etc.).

It is no secret that since 2012 the proffered language has been formulated and promoted nationwide to various state legislatures by ALEC, a conservative think tank, and the International Franchise Association. See https://www.alec.org/model-policy/resolution-on-the-misapplication-of-employee-classification-laws/ and  http://www.franchise.org/georgia-general-assembly-unanimously-approves-law-codifying-franchise-relationships-as-contractual. Thus far, ALEC/IFA’s efforts have been wholly successful in Georgia (O.C.G.A. § 34-1-9), Oklahoma (59 Okl. St. § 6005), Tennessee (Tenn. Code Ann. § 50-1-208), and Wyoming (Wyo. Stat. § 27-1-116); and partially successful in:

  • Indiana (Burns Ind. Code Ann. § 23-2-2.5-0.5): franchisor not employer or co-employer of franchisee or employee of franchisee unless franchisor agrees, in writing, to assume that role;
  • Louisiana (La.R.S. § 23.921): franchisee and franchisee’s employee not employees of franchisor for any purpose, except for unemployment and Workers Comp the franchisor may be deemed employer where it and franchisee share or co-determine matters governing essential terms and conditions of employment and directly and immediately control matters relating to the employment relationship such as hiring, firing, discipline and supervision;
  • Michigan (MCLS § 418.120):  employee of franchisee not employer of franchisor unless franchisee and franchisor share in determining matters governing essential terms and conditions of employment and directly and immediately control matters relating to employment relationship (hiring, firing, discipline, supervision, direction)),
  • Texas (Tex.Lab.Code §§ 21.0022 (employment discrim), 61.031 (wage payment), 62.006 (minimum wage), 201.021 (unemployment benefits), 401.014 (Workers Comp) 411.005 (worker health & safety):  franchisor not employer of franchisee or franchisee’s employees unless court finds franchisor exercised type or degree of control not customarily exercised by franchisor for purpose of protecting its trademarks and brand;
  • Utah (Utah Code Ann. §§ 34-28-2 (wage payment),  34-40-102(4)(a)(minimum wage), 34A-2-103 (Workers Comp), 34A-5-102 (anti-discrimination), 34A-6-103 (OSH), 35A-4-203 (unemployment):  franchisor not employer of franchisee or franchisee’s employee unless it exercises type or degree of control not customarily exercised by franchisor for purpose of protecting its trademarks and brand; and
  • Wisconsin (Wis.Stat. §§ 102.04(11) (Workers Comp), 104.015 (minimum wage), 108.065(4), 109.015 (wage payment, claims), 111.3205 (fair employment):  franchisor not employer of franchisee or of employee of franchisee unless agreed in writing to assume that role, or is found by department to have exercised a type or degree of control over franchisee or franchisee’s employees that is not customarily exercised by franchisor for purpose of protecting its trademarks and brand).

Although the effort to exempt franchisors from liability began in 2012, ALEC/IFA have more recently claimed that the impetus for promoting this legislation is growing alarm that franchisors could be held liable under existing law for federal labor and employment law violations. See, e.g., “NLRB Office of the General Counsel Issues Consolidated Complaints Against McDonald’s Franchisees and Their Franchisor McDonald’s, USA, LLC as Joint Employers,” Nat’l Lab. Rel. Board (Dec. 19, 2014), available at https://www.nlrb.gov/news-outreach/news-story/nlrb-office-general-counsel-issues-consolidated-complaints-against; Browning-Ferris Induss. Of California, Inc. d/b/a BFI Newby Recyclery, 362 NLRB No. 186 (Aug. 27, 2015) (definition of employer includes franchisor with direct, indirect, or reserved right of control); U.S. DOL W&H Administrator’s Interpretation No. 2016-1 (Jan. 20, 2016)(FLSA and NLRA share same definition of employment), available online at https://www.dol.gov/whd/flsa/Joint_Employment_AI.pdf; U.S. DOL Office of Solicitor Draft Memo (2015) (citing criteria for holding franchisor liable as joint employer with franchisee for OSH violations), available online at http://edworkforce.house.gov/uploadedfiles/osha_memo.pdf.

So who would SB131’s franchisor exemption  protect? According to the U.S. Census Bureau, in 2014 there were 168,472 employers in North Carolina, and 145,617 of those had fewer than 20 employees. See https://www.census.gov/data/tables/2014/econ/susb/2014-susb-annual.htmlMeanwhile, there were only approximately 2,531 franchisors in the entire United States. See https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk.The numbers of franchisors and franchisees in North Carolina are not publicly available, but based on the above figures it is virtually certain that the number of North Carolina-based franchisors is vastly outnumbered by the number of North Carolina small businesses operating as their franchisees. Bottom line: This bill would largely protect out-of-state interests.

Why, then, is this legislation necessary? In this writer’s opinion, the short answer is: It isn’t.

First, the federal interpretations that scared the bejesus out of ALEC/IFA would not necessarily impact N.C. law, and in all likelihood will be reversed by the Trump administration. See, e.g., http://www.franchise.org/ifa-encouraged-by-acosta-s-views-on-obama-era-joint-employer-regulation.

Second, judicial decisions do not demonstrate a trend toward franchisor liability. See, e.g., Pope v. Espeseth, Inc., 2017 U.S.Dist.LEXIS 4928 (W.D.Wis. Jan. 11, 2017) (granting summary judgment dismissing franchisor from FLSA and Wisconsin wage and hour litigation where franchisee was not required to follow franchisor’s recommended compensation methods or scheduling); Gesselle v. Jack in the Box, Inc., 2016 U.S.Dist.LEXIS 172061 (D.Or. Dec. 13, 2016) (franchisor was not joint employer where it did not have the power to hire/fire franchise employees, and was not responsible for or involved in determining work schedules, hours of employment, salaries, insurance, fringe benefits, or hours of work; providing mandatory payroll service that aggregates data and sends it to franchisees’ payroll providers was a ‘ministerial function’ insufficient to support argument that the franchisor controlled labor relations); Lovett v. SJAC Fulton IND I, LLC, 2016 U.S.Dist. LEXIS 111659 (N.D.Ga. Aug. 22, 2016) (granting summary judgment dismissing franchisor from FLSA litigation where there was no evidence that franchisor had the authority to hire, fire or modify employment conditions, supervised plaintiff or controlled her work schedule, determined her pay rate and method of compensation, or maintained her employment records, and did not provide the workplace or equipment); Salazar v. McDonald’s Corp., 2016 U.S.Dist. LEXIS 108764 (N.D.Cal. Aug. 16, 2016) (franchisor was not joint employer with its franchisees for purposes of wage and hour claims, where it did not retain or exert direct or indirect control over plaintiffs’ hiring, firing, wages, hours, or material work conditions).

Third, franchisors hold the reins and purse strings of the franchise relationship and without some risk of legal exposure would have little incentive to require franchisee compliance with wage and hour, OSH, Workers Comp, or unemployment insurance laws. However, a franchisor with potential liability has an incentive to choose responsible franchisees in the first place, and to require that those franchisees comply with labor and employment laws as the price of an ongoing franchise. (Franchisors additionally can – and likely already do – avoid personal exposure by requiring that franchisees agree to indemnify and insure against a franchisor’s potential litigation expenses and judgments. Arguably, adoption of this bill would eliminate that franchisee expense, but ONLY if the franchisor dropped these requirements, and how likely is that, given the plethora of federal laws unaffected by this bill?)

Fourth, under current law franchisors cannot be held liable as a joint employer without some substantial involvement in the franchisee’s day-to-day operations. Franchisors who truly take a hands-off posture simply cannot be held liable.

Fifth, if this bill passes it is conceivable under current North Carolina jurisprudence (looking at you, Powell v. P2Enterprises, LLC, 2016 N.C.App.LEXIS 609 (N.C.App. June 7, 2016)) that no one would be liable for violations of North Carolina law in cases where the franchisor was the decisionmaker.

Sixth, and finally, traditional notions of fundamental fairness require that wrongdoers be held liable for their wrongful acts.  For example, if a franchisor requires that its franchisees install and use the franchisor’s software system, and “encourages” its franchisees to use the software system’s “Payroll Report” function, who is liable when the system systematically underreports wages owed?  What if the franchisor knew that this was a problem but failed to notify its franchisees?   See People v. Domino’s Pizza, Inc., No, 450627/2016 (N.Y.Sup.Ct.) (alleging Domino’s Pizza knew of system’s wage errors since 2007 but did nothing to correct or notify franchisees), petition available online at https://ag.ny.gov/sites/default/files/domino_petition.pdf.

By the time this article posts, SB131 will likely have cleared the N.C. House, and will be back at the Senate awaiting final action. Whether you support or oppose this bill, if you want your position known, it will be important to contact your Senate representative.