A former Cinnabon employee in Washington can now move forward with a proposed antitrust class action suit over the company’s allegedly anticompetitive “no-poaching” agreements. These agreements are alleged to prevent franchises from hiring away workers from other Cinnabon franchises, thereby eliminating wage competition.
The U.S. House of Representatives lawmakers announced last week that they have prepared a bill that would establish that a business simply licensing a trademark, such as in the case of a license from a franchisor to a franchisee, would not create a so-called “joint employer” relationship.
Joint employment is the sharing of control and supervision of an employee’s activity among two or more businesses. This new bill, called the Trademark Licensing Protection Act of 2018, declares that if a company is licensed to use a trademark, this should not be enough to establish “an employment or principal agent relationship” between the two licensing entities.
Eight national restaurant chains have agreed to drop provisions in their franchise agreements that prohibit franchisees from hiring fellow franchisees’ employees. The removal of the “no-poach” hiring stipulation will be effective at all of their locations nationwide.
This move comes at the heels of announcements from Attorneys General from 10 states and the District of Columbia to investigate these “no-poaching” agreements. In addition to criminal and civil enforcement by both the state and federal governments, several franchisors are also facing federal class action lawsuits from employees alleging they were adversely affected by “no-poach” agreements.
With the recent news out of Washington that the Department of Labor has withdrawn Administrator’s Interpretation 2016-1 (its previous informal guidance on joint employment under the Fair Labor Standards Act (“FLSA”)), and with the National Labor Relations Board pulling back the broad joint employer standard set in the 2015 Browning-Ferris Industries of California, Inc. case, many are under the impression that the joint employer storm has passed.
While these are certainly welcome developments, franchisors should be careful not to dismiss the threat of joint employer liability too quickly. This is particularly true if you have outlets located in Maryland, Virginia, North Carolina, South Carolina, and/or West Virginia.
Stark & Stark would like to congratulate Shareholder Adam J. Siegelheim, Chair of the firm’s Franchise Practice, for being named by Franchise Times Magazine as a 2016 Legal Eagle. Mr. Siegelheim was even selected as a featured Legal Eagle.
Legal Eagles are selected each year from nominations by their clients and peers and are recognized as the top lawyers in franchising. This year’s selection focused on “around-the-clock” attorneys, who are always available for clients. When looking at this year’s list of Legal Eagles you will find “dedicated professionals who are available whenever their clients need them, steeped in knowledge about all things franchising – with plenty of interesting aspirations and outlets beyond the courtroom.”
For more information about this year’s Legal Eagle selections, please click here.
Join Stark & Stark’s Franchise Group at Booth #4768 during this year’s NRA show at McCormick Place in Chicago, IL from May 16-19, 2015. At the event, Shareholder Adam J. Siegelheim will moderate the educational seminar, How to Franchise Your Restaurant to Others: The Process Untangled, which will be held in room S404d on Sunday, May 17, from 11:30 AM – 12:30 PM.
Mr. Siegelheim will be joined by Allen Dikker, CEO of Potatopia, Phil Schram, Chief Development Officer of Buffalo Wings & Rings, and James Walker, President of Operations & Development at Johnny Rockets. This seminar will discuss in detail the process of franchising a restaurant. Attendees will learn the basics of franchising their business and walk away with a clear understanding of the process.
For more information on the event, please click here.
Stark & Stark would like to congratulate Shareholders Adam J. Siegelheim, Rachel L. Stark and Eric S. Goldberg, members of the firm’s Franchise Group, for being named by Franchise Times Magazine as Legal Eagles for 2015.
Legal Eagles are selected each year from nominations by their clients and peers and are recognized as the top lawyers in franchising. Only 193 attorneys nationwide have the honor of being named “Legal Eagles.”
For more information about this year’s Legal Eagle selections, please click here.
The decision of the National Labor Relations Board (“NLRB”) in July 2014 to authorize the filing of administrative complaints against McDonald’s USA, LLC (“McDonald’s”), the largest franchisor of restaurants in the United States, and recent court decisions, highlight one of the hottest issues in franchise law. Are your franchisees and their employees actually your employees?
The NLRB investigated 181 cases alleging that McDonald’s franchisees and their franchisor, McDonald’s, violated the rights of workers as a result of activities surrounding fast food strikes and protests. It found “sufficient evidence” to issue a complaint in 43 of these cases, and determined that McDonald’s should be considered a joint employer with its franchisees.
The “joint employer” doctrine allows a plaintiff to hold a non-employing party vicariously liable for the employment actions of the employing party. As a “joint employer” with its franchisees, McDonald’s would be equally liable for labor violations committed by its franchisees. Until this issue is resolved, franchisors risk liability for the actions of their franchisees.
Although the NLRB has authorized the filing of complaints, this is a preliminary ruling, and the NLRB has not yet decided the “joint employer” question on the merits. Administrative law judges will make rulings after a hearing, and the losing party can appeal to the full NLRB board in Washington, D.C. NLRB decisions could be appealed to a federal appeals court, and then possibly to the U.S. Supreme Court.
In August 2014, the California Supreme Court held that Domino’s Pizza LLC was not liable for the acts of a franchisee whose manager had allegedly harassed an employee. The decision was based largely on the terms of the franchise agreement between Domino’s and its franchisee. However, the court stated that a franchisor “will be liable if it has retained or assumed the right of general control over the relevant day-to-day operations at its franchised locations … and cannot escape liability in such case merely because it failed or declined to establish a policy with respect to that particular conduct.”
The consequences of misclassifying individuals as independent contractors can be severe, and include: withholding tax obligations; wage damage claims; unemployment tax obligations; employment discrimination claims; workers’ compensation liability; vicarious liability; income tax liability based on presence in state; and IRS and state audits with related taxes and penalties.
Franchisors therefore need to closely analyze their business arrangements and agreements with independent contractors and franchisees to protect themselves. Maintaining a uniform system and protecting brand identity cannot become exerting control over the day-to-day operations of the franchisee’s business.
For example, contract terms should clearly state that the franchisee is not an agent of the franchisor, and that the franchisee must comply with all federal, state and local laws and regulations. The franchisee can also be required to incorporate, so that the franchisor is dealing with a separate legal entity. Other suggestions include limiting the amount of control exercised on matters that could affect franchisee employees, and not making employment decisions, including setting wages or making employment policies that affect the discipline or termination of workers.
In addition to unveiling the new iPhone and Apple Watch, Apple’s CEO, Tim Cook, also recently announced that the approximate 500 million iTunes users would also be receiving a free digital copy of U2’s latest album, Songs of Innocence. The album would be automatically downloaded and appear in each user’s iTunes library without the person having to do anything.
Analysts are estimating that this deal with U2 cost Apple approximately $100 million dollars. Apple likely calculated that the publicity and good will they expected to receive far exceeded this cost.
However, Apple’s marketing team did not anticipate the negative backlash sparked through social media and other outlets. Here is an article that refers to Apple’s approach as “invasive.”
Angry iTunes customers demanded to know how they could remove this U2 album that they did not ask for or want. Even fans who wanted the album complained about Apple downloading it onto their account without asking for their consent. In response, Apple had to develop a separate website which details the process for users to remove the U2 album from their library.
In addition to upsetting its customers, Apple also had to deal with unwanted media coverage criticizing Apple’s decision to download the music directly onto user’s iTunes library, rather than making the free download available for anyone who was interested, i.e., giving their customers a choice in the matter.
Apple’s misstep can serve as a lesson to franchise companies. Many franchise executives have the same thought process as Apple. They expect their franchisees to be thrilled by some new initiative that is going to increase their profitability, increase their sales, increase brand awareness, etc. What they do not take into account, is that franchisees, like Apple’s customers, want to feel they have a say in the process and that they are not being dictated to.
Successful franchise systems have strong franchisor-franchisee relationships. One of the quickest ways to weaken this relationship is to take steps where the franchisees feel that something is being force fed to them. A franchisor advising of a new initiative, without any input from its franchisees should expect results similar to what Apple received from their customers.
In Naik v. 7-Eleven, Inc., (U.S. District Court. D.N.J., Civil No. 13-4578), certain 7-Eleven franchisees in New Jersey alleged that they are employees, not independent contractors, of the franchisor, and that the franchisor violated the federal Fair Labor Standards Act (FLSA) and other New Jersey statutes. 7-Eleven made a motion to dismiss, which was denied by the court.
Each plaintiff entered into a franchise agreement with 7-Eleven. Despite clear language in the franchise agreement indicating that the franchisees operated independently owned and operated businesses, the franchisees claimed that the “economic reality” was that they were employees of the franchisor and entitled to protections under the FLSA, New Jersey Wage and Hour Law and the New Jersey Law against Discrimination.
In an effort to support their claim, the franchisees relied on numerous factors, including:
- The Franchisor asserts a high level of control over vendor and suppliers, product pricing and advertising;
- Payroll is processed through the franchisor’s payroll system;
- Franchisee’s required to wear uniforms designated by Franchisor;
- Franchisor’s managers oversee Franchisee’s locations on a daily basis;
- Franchisor controls the volume of store televisions and thermostat from their corporate headquarters;
- Franchisees are prohibited from having active business interests in other ventures;
- Bookkeeping and accounting is done by the Franchisor and the Franchisee cannot withdraw money without the Franchisor’s consent.
In denying the Franchisor’s motion to dismiss, the court noted that the issue of the classification of an independent contractor vs. an employee for purposes of New Jersey wage claims was still unsettled and the issue was in the process of being examined by the New Jersey Supreme Court. However, the Court did take note that the Franchisor has exerted significant and pervasive control over the Franchisee’s operations.
While the court has yet to issue a final decision on this case, it certainly serves as a stark reminder for Franchisors to evaluate whether the controls it exerts over its franchisees are necessary to protect brand standards or whether the controls go above and beyond this need.