Can a franchisor be held liable for the actions of its franchisees towards their own employees ?

Avocats, Conseils en réseaux

The debate is raging across the Atlantic after the National Labor Relations Board published a new “rule” on the issue of co-employment on October 27, 2023.

The National Labor Relations Board (NLRB) is the U.S. federal agency responsible for implementing the National Labor Relations Act.

On October 26, 2023, this agency published a new “rule” modifying the current state of federal law with regard to the question of co-employment.

Since 2020, a company is considered to be a co-employer if it exercises substantial direct and immediate control over the essential working conditions of the employees of another company.

Under the NLRB’s new “rule”, any company that has the power to control – directly and/or indirectly – or the ability to exercise the power to control – directly and/or indirectly – one or more of the essential working conditions of a third party’s employees may be considered a co-employer.

The NLRB specifies that “essential working conditions” include standards governing the manner, means and methods of employee work, as well as all matters relating to health and safety in the workplace.

However, in view of the criticism voiced by a number of stakeholders, including network heads, the entry into force of this new “rule” has been postponed until February 26, 2024.

What are the implications for franchisors?

A number of articles on the subject point to the major risks posed to network heads by changes to the co-employment rule.

Many of them consider that franchisors will not be able to escape the qualification of co-employers, and therefore risk being held liable for the failings of their franchisees vis-à-vis their own employees.

Indeed, control over the operating conditions of franchised points of sale is the very essence of franchise networks, whose aim is to enable members to replicate the franchisor’s commercial success while protecting the network’s brand image.

For example, in restaurant networks, the know-how passed on generally implies compliance with specific standards in terms of: health safety, organization and distribution of tasks between employees, cooking, cutting, assembly, presentation of commercialized dishes, or even wearing specific clothing, respecting a certain opening hours, etc. It is therefore highly likely that the franchisee will not be able to take advantage of this know-how.

It is therefore highly likely that the franchisor will be considered to have, at the very least, the power to indirectly control at least one of the essential working conditions of its franchisees’ employees.

Paradoxically, American franchisors are therefore encouraged to:

– to invest heavily in the management of their franchisees’ employees, by offering them a network-wide HR department, for example.

The risk here is that the franchisee’s independence will be greatly reduced, and that courts will eventually consider that the franchisee’s business and the franchisor’s business are one and the same. This entails a major risk in the event of a franchisee’s bankruptcy, for example.

– Or, on the contrary, to restrict network standards and the assistance provided to franchisees in running their points of sale.

In this case, the raison d’être of franchising is largely called into question.

This change in regulations across the Atlantic is a reminder of how important it is for franchisors to bear in mind that franchisees remain independent business owners, and that they must avoid interfering in the running of their business at all costs.

Avocats, Conseils en réseaux

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