Heightened concerns over recent National Labor Relations Board (“NLRB”) complaints authorized against McDonald’s, USA, LLC—which threaten to undermine the common understanding of a franchisor-franchisee relationship and expand the definition of “employer”— caught the eye of Texas legislators during the recently concluded 84th Regular Texas Legislative Session.

In response to the wide-reaching implications accompanying a determination that would classify franchisors as joint employers with its franchisees, Senator Schwertner filed SB 652. SB 652 passed prior to Sine Die, was signed by Governor Abbott on June 19, 2015, and will become effective on September 1, 2015. SB 652 clarifies state law regarding franchisor-franchisee relationships “[i]n an effort to ensure that franchisors in Texas are not held unfairly liable for the actions of franchisees, to prevent frivolous lawsuits and to encourage franchisees to act responsibly.” H. Comm. Rep., Bill Analysis, Tex. S.B. 652, 84th Leg., R.S. (2015).

The passage of SB 652 generally protects franchisors from blanket exposure to employment claims asserted by franchisees and their employees. Specifically, the law amends the Texas Labor Code to confirm that a franchisor is not considered an employer with respect to its franchisee or its franchisee’s employees. The franchisor is not considered an employer for any purpose, including employment discrimination law, wage and hour law, minimum wage law, professional employer organization law, unemployment law, workers compensation law and workplace safety law.

While the Texas law is a step in the right direction to protect franchisors from broad application of employer liability, franchisors should be aware of limitations. For example, the new law does not prevent employment claims if the franchisor exercises control over the franchisee or the franchisee’s employees above and beyond what is necessary to protect the franchisor’s trademarks and brand. That is, traditional principles of vicarious liability will still apply.

Future decisions will inevitably mold and shape the standards of conduct revealing what conduct constitutes “necessary” control versus control not customarily exercised by a franchisor that effectively eliminates the shelters built into SB 652. Franchisors based in Texas or with franchisees operating in Texas should remain mindful of examples cited by the NLRB general counsel (and analyzed more thoroughly here) which may indicate franchisor control:

  • Keeping track of data on sales, inventory and labor costs;
  • Calculating the labor needs of franchisees;
  • Setting and policing work schedules;
  • Tracking franchisee wage reviews;
  • Tracking employee performance such as time to fill customer orders; and
  • Accepting and screening employment applications through the franchisor’s system.