College legends shape minds forever. Having attended the University of California, Berkeley, “The Play”—an unscripted play to win over arch-rival Stanford with only four seconds on the clock – was the subject of a mandatory course. It is also a cautionary tale on what can happen when attention lapses.

Reading up on commentary regarding joint employment claims that have been made against franchisors reminds me of that game. Portions of the business press (perhaps Stanford grads?) have announced that with the Republican party controlling the Executive Branch, joint employment claims will disappear. However, there are several reasons to remain cautious:

First, changes in federal enforcement will not happen overnight. For example, there are appointments to be made and confirmed by the Senate; there are pending cases that will need to be ruled on (e.g., pending unfair labor practice complaints at the NLRB); and, elsewhere, formal opinions issued under the FLSA (Administrator’s Opinion No. 2016-1) to be reconsidered by a yet to be confirmed successor.

Second, changes in federal enforcement offer limited solace when issues of state law continue to create potential exposure. This includes both common law theories and interpretations of state statutes governing employment. For example, Ochoa v. McDonald’s, No. 3:14-cv-02098-JD (N.D. Cal.), held that while McDonald’s was not a joint employer, issues of fact existed as to whether it could be held liable under an ostensible agency theory.

Third, Washington D.C. is not the sole problem for franchisors. Rather, the plaintiffs’ bar (bringing cases like Ochoa) is an equal if not greater risk. Despite established law holding that franchise controls are insufficient to establish joint employment, this has not deterred private litigants from seeking to hold franchisors jointly liable in individual and class-action suits throughout the country.

Given all this, what should franchisors do?

There are options. One is better patrolling the border on joint employer issues; the other is to find innovative means to get franchisees into compliance (especially with wage-hour laws). The former is the conventional wisdom; the latter is – for now – unconventional and untested (and is illustrated by what Subway did in its pact with the Department of Labor).

For today, let’s look at how best to patrol the border to avoid joint employment findings.

Emerging case law developments inform that effort.

  • In Gesselle v. Jack in the Box, Inc., 2016 WL7223324 (D. Ore. Dec. 13, 2016), a federal district court held that mere “power to terminate a franchise … is not sufficient to create a joint employment relationship”; that franchise controls do not establish an employer-employee relationship because “[s]uch policies are merely reflective of an inherent interrelationship of operations …and [the franchisor’s] goal of attaining conformity to certain operational standards and details”; that a franchisor who provides payroll services or other “ministerial functions” to franchise employees is not thereby a joint employer; and that the “provision of nonmandatory advisory materials relating to Human Resources and the training of franchise employees” does not establish a franchisor’s control over franchise employees.
  • In Pope v. Espeseth, Inc., 2017 U.S. Dist. LEXIS 4928 (W.D. Wis. Jan. 11, 2017), another federal district court granted summary judgment in favor of the franchisor based on its operations manual, which expressly stated that “all personnel-related documents and recommendations” were “optional and should be modified and customized as the franchisee deems appropriate […] to suit their own business needs.” This express disclaimer, along with the franchisee’s actual practice of modifications (e.g., paying a different commission rate than recommended) precluded a finding that the franchisor was a joint employer under the FLSA or Wisconsin state law.
  • In Nutritionality, Inc. d/b/a Freshii, Case Nos. 13-CA-134294, 13-CA-138293, and 13-CA-142297 (Apr. 28, 2015), the NLRB’s general counsel provided guidance under both its traditional rule on joint employment and its more recent Browning-Ferris standard. There, the General Counsel declined to prosecute Freshii because it had no direct role in hiring, firing, disciplining or supervising, setting wages, benefits, or work hours. Although it accepted online employment applications, those were forwarded to franchisees without screening or analysis. Franchisees had access to manuals and handbooks, but the franchise agreement did not require their use and expressly disclaimed control over labor and employment matters. The extent of Freshii’s control dealt with standardizing the product and customer experience and, as a result, was not sufficient indicia of joint employment.

These developments provide valuable guidance on improving franchise agreements:

  • Franchisors should minimize controls or requirements that are not needed to protect the franchise system or the brand.
  • Franchise agreements should state the parties’ mutual intent to be independent contractors (even though that alone is not dispositive).
  • Franchise agreements should affirm that the franchisee will make all decisions on hiring, firing, promotion, and disciplining its employees.
  • Franchise agreements should provide that any personnel policies made available are optional and that the franchisee alone will chose whether and how to use these policies.

Concomitantly, these developments suggest best practices on revisiting franchise controls.

  • These cases highlight the value of self-imposed limits on the franchisor’s control, especially with respect to employment-related topics. Now, more than ever, it is critical to balance the desire for control against the risk of exposure on joint employment.
  • While there will inevitably be circumstances where franchisor personnel interact with franchisees’ hourly employees, franchisor employees should be programmed to interact primarily with franchisee ownership and management.
  • Franchisees should make their own personnel decisions (hiring, firing, promotion, and discipline) and set their own employee compensation policies. This franchisee autonomy should be documented at every opportunity.
  • To the extent practicable, training programs should be limited to franchisee’s supervisorial and managerial employees, who in turn can independently train the franchisee’s hourly staff.
  • Employment applications should specify that the applicant is applying to the franchisee, not the franchisor, for employment. This can also be reinforced with disclaimers acknowledging employment with the franchisee, not the franchisor.
  • Franchisees should create their own employment manuals and policies. Where franchisees are given sample personnel policies or manuals, it should be clearly documented that this is merely a resource and that its use is optional.

There is also assistance (but only with respect to state law claims) coming from legislative efforts at the state level. In the past two years, Texas, Tennessee, Louisiana, Utah, Wisconsin, Georgia, Michigan, Oklahoma, Indiana, South Dakota, North Dakota, Arizona, Wyoming, Kentucky, and Arkansas have enacted laws expressly stating that a franchisor is not an employer of a franchise and its employees.

This is a huge boost in those states but no basis to rest on the laurels of those successes given the risks under federal laws and in other states. Watch “The Play” just once and you too will understand what all of us who attended Cal cherish as sacred text: never coast, never quit, and never slow down if you intend to win.