The latest joint employer rule from the National Labor Relations Board may have been blocked in federal court, but the subject remains a center of focus in the franchise community.
For franchisors and franchisees alike, the rule’s potential impact on litigation is an especially important factor to keep track of. Under the new rule, released by the NLRB in October, a franchisor would share in the liability for labor law violations of its franchisees.
In response to the rule, the International Franchise Association stated a similar joint employment approach during the Obama administration led to a 93 percent increase in lawsuits. For franchisees, indemnification clauses mean much of the responsibility for such litigation would still fall on them.
In a legal agreement, indemnification clauses shift costs and risks in certain situations—such as litigation—to a specific partner which, in the case of franchising, is the franchisee. Keith Miller, director of public affairs for the American Association of Franchisees & Dealers, said these clauses are in most franchise agreements and still allowed by the new rule.
AAFD Public Policy and Engagement Director Keith Miller
“A franchisee may have two issues with the indemnification clauses,” Miller said. “One, because a franchisor is brought in with the deep pockets, a jury or someone might award higher values. If it’s McDonald’s, they might say, ‘It’s $2 million, what is that to them?’ So, a franchisee’s pocket gets picked clean until the franchisor has to pay.
“The second would be a franchisee getting stuck with the franchisor’s lawyer bills,” said Miller. “If the franchisor knows you can afford it, they might be more willing to run up the legal bills and then tack those on to the owner.”
Andrew Malzahn, an attorney at Dady & Gardner, said a key issue with the clauses he sees are those written too broadly. Malzahn said indemnification clauses are fine if something happens within a franchisee’s control, such as a person falling in an owner’s restaurant, but becomes detrimental to owners when the lawsuit is related to a brand’s system.
“When the franchisee does everything that the franchisor says should be done to the letter of the FDD, manuals, or otherwise, and then both are sued, the franchisee is responsible to defend and indemnify a franchisor for merely following the system,” Malzahn said. “That’s my problem.”
J. Michael Dady, also of Dady & Gardner, said his firm works with potential franchisees to draft addendums to franchise agreements to narrow the scope of the clauses to make them more equitable.
“If it’s the franchisee’s fault, say someone fell because the sidewalk is bad, the franchisor shouldn’t be sued for that,” Dady said. “But when it’s the other way around, and a franchisor is in the wrong, that should be on them. It’s a big deal for franchisees. Most of the time this is passive, but when it happens, it can be catastrophic for a single-store franchisee to defend and indemnify a joint employer. It’s very expensive, especially in a situation where they did nothing wrong.”
Attorney J. Michael Dady
Robert Branca, a board member for the Coalition of Franchisee Associations, said another issue is the potential for increased brand oversight.
“A concern is if the new rule is enacted, it will encourage franchisors, who would typically not want to, exert control because they’re afraid of liability,” Branca said. “That they might say, ‘This two- or one-unit operator isn’t as sophisticated as my 40- or 50-unit operators and doesn’t have an HR department or in-house attorney. I can’t trust them to do the right thing every time, so I’m not going to take that chance.’”
Enactment of the rule was stopped in March when U.S. District Judge J. Campbell Barker Tyler, Texas, struck it down. The decision has since been appealed by the NLRB. Miller said the latest change is frustrating, as it reversed the rule set in place during the Trump administration.
“The broader point is we don’t think the Trump administration rule goes far enough and we think the Biden rule goes too far,” Miller said. “We’re kind of in the middle. Let’s get some place where we can all live with and move on, instead of switching with the party in the White House.”
Related: President Biden Vetoes Bill to Rescind Joint Employer Rule, Legal Fight Continues
“At the CFA, we don’t agree with the extremes of either argument,” Branca said. “We think there are cases where franchisors are joint employers, or can be. We also don’t agree with this new rule that says just because a franchise agreement gives franchisors rights to do things under circumstances, it creates a joint employer.”