The projected growth in the franchise sector in the USA in 2016, as per the IFA’s report, bodes well for franchising except if the whole sector comes crashing down due to an unprecedented federal ruling on the joint-employer issue that makes both franchisor and franchisee jointly liable for a franchisee’s employees. According to the report, “A recent ruling by the National Labor Relations Board that was based on the premise that a franchisor can be viewed as a ‘joint employer’ and thus responsible for actions taken by its franchisees, creates a cloud of uncertainty over the franchise sector. If this ruling survives legal challenges, it will impose additional costs on franchisors associated with the need for more oversight and insurance against risk. Uncertainty about how this issue will be resolved could impede the growth of franchise business formation, employment and output – causing the performance of the franchise sector to fall short of this forecast based on economic fundamentals.”

Recently in the USA the National Labor Relations Board (NLRB) investigated a number of complaints in respect of employment matters in the franchise industry. The NLRB announced that it considers the McDonald’s franchisor as a joint-employer of employees of McDonald’s franchisees especially in view of the McDonald’s franchisor’s control over the franchisee’s employees. Reference is made to the Browning-FerrisIndustries of California case [Case 32 RC 109684, 27 August 2015]where it was held that indirect or potential control by a party over working conditions of employees may be sufficient to regard such a party as joint-employer.

In the subsequent case of Ochoa v McDonald’s Corporation[US Dist LEXIS 129539, ND Cal, 24 September 2015]the District Federal Court in California excluded joint-employer liability and found that the McDonald’s franchisor did not exercise direct control over the hiring, firing, work schedules and payment of employees. The mere fact that the McDonald’s franchisor provided a software system in terms of which the franchisees are managing their employees, did not mean that the franchisor controlled the franchisee’s employment decisions.

The court did however mention that a franchisor may be liable as joint-employer in terms of the ostensible agency theory in the event where employees of the franchisee may have reasonably believed that the franchisor was their employer and that they were working for the franchisor. The legal status regarding joint-employment between employees, franchisees and franchisors in the USA market are still a sensitive matter in progress which will surely be tested further in upcoming proceedings. In the interim, franchisors would be well advised to carefully consider the degree of control and power which it exercises over a franchisee’s employees.

Nearly all franchisors in the USA — 97% — believe the joint-employer rule, should it be allowed to take effect, would negatively impact their business, and 82% said that impact would be “significant” in the IFA’s most recent Franchise Business Leader Survey.

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