Blawg

Within the franchise world, there has been a lot of buzz about joint employment.  Being held accountable as an employer creates exposure to wage, discrimination, and other employee claims. 

The legal determination of who is an employer can be swishy.  The US Department of Labor has put out for comment new regulations that would clear the issue up, to some extent.  Under the purposed regulations set forth a 4 prong test.  Under the test an employer:

• hires or fires the employee;
• supervises and controls the employee’s work schedules or conditions of employment;
• determines the employee’s rate and method of payment; and
• maintains the employee’s employment records.
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As part of the purposed regulations, the US Department of Labor posted hypotheticals under the test.  Can you determinate if an employer relationship is present?

(1) Example (National Restaurant Franchise)

An individual works 30 hours per week as a cook at one restaurant establishment, and 15 hours per week as a cook at a different restaurant establishment affiliated with the same nationwide franchise. These establishments are locally owned and managed by different franchisees that do not coordinate in any way with respect to the employee. Are they joint employers of the cook? [i]

(2) Example (Same Owner, Multiple Restaurants)

An individual works 30 hours per week as a cook at one restaurant establishment, and 15 hours per week as a cook at a different restaurant establishment owned by the same person. Each week, the restaurants coordinate and set the cook’s schedule of hours at each location, and the cook works interchangeably at both restaurants. The restaurants decided together to pay the cook the same hourly rate. Are they joint employers of the cook? [ii]

(3) Example (Janitorial Services)

An office park company hires a janitorial services company to clean the office park building after-hours. According to a contractual agreement with the office park and the janitorial company, the office park agrees to pay the janitorial company a fixed fee for these services and reserves the right to supervise the janitorial employees in their performance of those cleaning services. However, office park personnel do not set the janitorial employees’ pay rates or individual schedules and do not in fact supervise the workers’ performance of their work in any way. Is the office park a joint employer of the janitorial employees? [iii]

(5) Example (Hotel Industry Franchise)

Franchisor A is a global organization representing a hospitality brand with several thousand hotels under franchise agreements. Franchisee B owns one of these hotels and is a licensee of A’s brand. In addition, A provides B with a sample employment application, a sample employee handbook, and other forms and documents for use in operating the franchise. The licensing agreement is an industry-standard document explaining that B is solely responsible for all day-to-day operations, including hiring and firing of employees, setting the rate and method of pay, maintaining records, and supervising and controlling conditions of employment. Is A a joint employer of B’s employees? [iv]

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[i] Application [the answer]: Under these facts, the restaurant establishments are not joint employers of the cook because they are not associated in any meaningful way with respect to the cook’s employment. The similarity of the cook’s work at each restaurant, and the fact that both restaurants are part of the same nationwide franchise, are not relevant to the joint employer analysis, because those facts have no bearing on the question whether the restaurants are acting directly or indirectly in each other’s interest in relation to the cook.

[ii] Application [the answer]: Under these facts, the restaurant establishments are joint employers of the cook because they share common ownership, coordinate the cook’s schedule of hours at the restaurants, and jointly decide the cook’s terms and conditions of employment, such as the pay rate. Because the restaurants are sufficiently associated with respect to the cook’s employment, they must aggregate the cook’s hours worked across the two restaurants for purposes of complying with the act.

[iii] Application [the answer]: Under these facts, the office park is not a joint employer of the janitorial employees because it does not hire or fire the employees, determine their rate or method of payment, or exercise control over their conditions of employment. The office park’s reserved contractual right to control the employee’s conditions of employment does not demonstrate that it is a joint employer.

[iv]  Application : Under these facts, A is not a joint employer of B’s employees. A does not exercise direct or indirect control over B’s employees. Providing samples, forms, and documents does not amount to direct or indirect control over B’s employees that would establish joint liability.

When signing the franchise agreement, prospective franchisees usually form a business entity to own and operate the franchise.  But, who can sign the franchise agreement on behalf of the franchise business entity? 

The recent case of Extremely Clean Cleaning Services, LLC, Alisia Burks v. CAAT, Inc.[i]  ponders this question.  In this case, co-plaintiff Alisia Burk (“Ms. Burk”), a prospective franchise formed the business entity Extremely Clean Cleaning Services, LLC to be the franchisee business entity. Defendant CAAT, Inc. was the franchisor.  Burk’s mother Kearl Ash (“Ms. Ash”) signed the franchise agreement on behalf of business entity Extremely Clean Cleaning Services, LLC; however, Ms. Ash, Ms. Burk’s mother did not have any ownership interest in the franchise. 

Immediately post the signing of the franchise agreement, Ms. Burk registered a complaint about her mother Ms. Ash signing the franchise agreement saying Ms. Ash did not have authority to the sign the franchise agreement on the franchisee’s behalf.  Irrespective of the complaint about the signing, Ms. Burk opened and operated the franchise.  After three years of business, Ms. Burk abandons the franchise asserting that the franchise agreement was not properly signed.

Ratification means the adoption of that which was done for and in the name of another without authority. It is in the nature of a cure for [lack of] authorization. When ratification takes place, the act stands as an authorized one, and makes the whole act, transaction, or contract well from the beginning. Ratification is a question of fact, and ordinarily may be inferred from the conduct of the parties. The acts, words, silence, dealings, and knowledge of the principal, as well as many other facts and circumstances, may be shown as evidence tending to warrant the inference or finding of the ultimate fact of ratification. Knowingly accepting benefits of unauthorized employment amounts to a ratification of such contract of employment and is in the nature of estoppel to deny the authority to make such contract. Ratification by a corporation may be shown by conduct, without any formal action of its board of directors.

Indiana Law

Was there a binding franchise agreement, even though Ms. Ash did not have authority to sign the franchise agreement on the franchisee’s behalf.  Does the subsequent three years operation of the franchise business ratify or translate to affirmation and enforceability of the franchise agreement? 

The court remanded the case for the more factual determinations.  It is possible that irrespective of the improper signing of the franchise agreement, the franchisee’s act of operating the franchise business resulted in a binding franchise agreement.  The inverse may also be true.

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[i] Business Franchise Guide – Explanations, Laws, cases, rulings, new developments, Extremely Clean Cleaning Services, LLC, Alisia Burks, Plaintiffs v. CAAT, Inc., an Ohio Corporation, Anago Cleaning Systems, Inc., a Florida Corporation, Anago Franchising, Inc., a Florida Corporation, Albertson Family Janitorial Holdings, Inc., an Ohio Corporation, Curt Albertson, an individual, Corey Albertson, an individual, Teresa Albertson, an individual, David R. Povlitz, Defendants., U.S. District Court, S.D. Indiana, ¶16,372, (Feb. 25, 2019)

A prospective franchisee raises a concern regarding a specific provision in the franchise agreement. Can the franchisee modify the franchise agreement base on the prospective franchisee’s concern?  e

The franchise agreement is an exhibit included in the franchise disclosure document (FDD).  The franchisor must offer prospective franchisees the franchise agreement as it appears in the FDD.  The franchisor may not offer franchise agreements different than it appears in the FDD.  However, a prospective franchisee requests a change to the franchise agreement, the franchisor may agree to the requested change. This is referred to as franchise agreement negotiated changes.

The prospective franchisee is a great candidate.  The prospective franchisee would be a great franchisee. Can the franchise agreement be modified to entice the prospective franchisee? 

There are several best practices to follow:

• Always offer the franchise agreement as it appears in the Franchise Disclosure Document (FDD).

• Ask the prospective franchisees to put a requested change in writing (it can an email).

• Any changes to the franchise agreement should be made in an addendum. The franchise agreement should not be changed. 

If the franchisor agrees to waive the initial franchise fee or other fees charged by the Franchisor, a notation of fee non-uniformity must be made in the FDD. 

And for franchisees sold to California residents or business operating in California, a negotiated form must be filed. 

The Federal FTC Franchise Disclosure Rule prohibits franchisors from sharing, discussing, giving, or showing prospective franchisees financial performance information unless the information is contained in the franchisor’s franchise disclosure document (FDD). 

What about after the franchise agreement is signed?  All rules are off.  The FTC Franchise Disclosure Rule applies to the prospective franchisees.  Once the franchisee signs the franchise agreement, the franchisee is no longer a prospect. The upshot is the FTC Franchise Disclosure Rule does not apply to the disclosing, sharing, discussing, giving, or showing franchisees financials information.  Franchisors are free to share financials information post the signing of the franchise agreement.

Because they were no longer “prospective franchisees” when Haines showed them the profit and loss statements, showing them the statements did not violate the Franchise Rule. See 16 C.F.R. §§436.1(e) and 436.5(s).

Relo Franchise Services, Inc., Plaintiff v. Connor Gilman, et al., Defendants.  Case No. 1:18-cv-578 Business Franchise Guide – Explanations, Laws, cases, rulings, new developments ¶16,350

One caution should be rendered.  Commonly, franchisors will negotiate with existing franchisees about the purchase of new or additional franchises or opportunities.  In this case, the existing franchisee may be considered a prospective franchisee in regards to the new or additional franchise and to wit, the franchisor should not share, discuss, give, or show prospective existing franchisees financial performance information unless the information is contained in the franchisor’s franchise disclosure document (FDD).

State laws very as to when the franchise registration expire.  Some states only require a one-time filings or exemptions.  Other state franchise registrations and exemptions must be renewed yearly. 

Annual Filing Required	One Time Filing Required
California	Connecticut
Florida	Georgia
Hawaii	Kentucky
Illinois	Louisiana
Indiana	Maine
Maryland	Nebraska
Michigan	*North Carolina *South Carolina
Minnesota	Texas
New York
North Dakota
Utah
Rhode Island
South Dakota
Virginia
Washington
Wisconsin

* South Carolina and North Carolina allow for an exemption if franchisor has a federally registered trademark and franchisee do not purchase products from franchisor for re-sale. 

Federal law requires that all franchisors update their franchise disclosure document (FDD) 120 days from the close of their fiscal year.  For franchisors with a fiscal year that follow a calendar year ending December 31^st, the FDD must be updated by April 30^th. 

Not all states, if fact most states registrations and exemptions don’t follow the Federal April 30^th date. 

Not all states, if fact most states registrations and exemptions don’t follow the Federal April 30^th date. 

There are only 7 state: California, Hawaii, Illinois, New York, Minnesota, North Dakota and South Dakota follow the federal rule and expire 120 days from the close of the fiscal year (April 30th).

Expiration 120 Days from Close of Fiscal Year (April 30th)	Calendar Expiration (365 days)
** California	Florida
Hawaii	Illinois
New York	Indiana
Minnesota	Maryland
North Dakota	Michigan
South Dakota	Utah
	Rhode Island
	Virginia
	Washington
	Wisconsin

* California registration action Expires April 20th (10 days early)

Not all states, if fact most states registrations and exemptions don’t follow the Federal April 30^th date. 

There are 9 state that follow a calendar year expiration:  Florida, Indiana, Maryland, Michigan, Utah, Rhode Island, Virginia, Washington, Wisconsin.

The quandary becomes post April 30^th, Federal Law requires an update of the FDD.  However, what if the state registration has not expired.  The state prohibits giving prospective franchisees the updated FDD until it has been register with the state.  But, giving prospective franchisees last year’s FDD that is registered with the state is violation of Federal law. 

Franchisee as commonly asked to sign a general release of claims when entering to a franchise agreement when to transfer a franchise, when renewing a franchise, and when entering to a settlement agreement.  Under a general release of claims, franchisees give up their right to sue the franchisor. 

However, not always does the release of claims effective operate to release or prevent claims against a franchisor.  Hence the case involving Charlie Grainger hot dog franchises.[i]   It this case a class of franchisees and area representative sued the franchisor making claims of  (1) rescission; (2) fraud, intentional misrepresentation, and concealment; (3) negligent misrepresentation; (4) breach good faith and fair dealing; (5) breach of fiduciary duty; (6) violation of North Carolina’s Unfair and Deceptive Trade Practices Act; (7) racketeering activity, in violation of 11 U.S.C. §1962(b); (8)  a pattern of racketeering activity, in violation of 11 U.S.C. §1962(c); (9) conspiring to violate the RICO Act; and (10) breach of contract.

The franchisor sought dismissal of the claims based on release claims signed by each of franchisees and area representatives incident to the signing of their franchise agreements.  Under the release of the claims, franchisees and area representative waived their right to sue the franchisor.

Plaintiffs [Franchisees] argue that the General Release is void because it violates federal law. In particular, they argue that the release violates the Federal Trade Commission’s Franchise Rule, which provides in pertinent part that it is “an unfair or deceptive act or practice” to “[d]isclaim or requires a prospective franchisee to waive reliance on any representation made in the disclosure document or in its exhibits or amendments.” 16 C.F.R. 436.9(h).

Id.

Not so fast, the court rejected the release of claims.  In agreement with the franchisees and area representatives, the court held that the release of claims was in violation of the federal law; more particularly the FTC Franchise Disclosure Rule.  The FTC Franchise Disclosure Rule prohibits disclaiming or waiver of any disclosures made in the franchise disclosure documents. 

For other reasons the court dismissed RICO and Racketeering, but allow claims of (2) fraud, intentional misrepresentation, and concealment; (3) negligent misrepresentation; 5) breach of fiduciary duty; and (6) violation of North Carolina’s Unfair and Deceptive Trade Practices Act to proceed.

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[i] Trident Atlanta, LLC, Dual Energy, LLC, Cynergetic AR, LLC, Ms. Marcie Bindes d/b/a KS Enterprises, LLC, Mr. Dale Atkinson & Mrs. Rose Atkinson d/b/a Rosedale Three, LLC, and Mr. Trent Moore d/b/a LindsTan, Inc., Plaintiffs v. Charlie Graingers Franchising, LLC, Charlie Graingers Franchising, Inc., Louis Craig North, Gregory Bruce George, and Jason Matthew Nista, Defendants. No. 7:18-CV-10-BO Business Franchise Guide – Explanations, Laws, cases, rulings, new developments ¶16,354

The Federal Trade Commission (FTC) drafter of the Franchise Disclosure Rule, which requires the delivery of the Franchise Disclosure Document to prospective franchisee is looking for comments.  The comment requires part of the FTC periodic review of the cost and benefits of the regulations.  Specifically, the FTC is looking for comments on the following questions: 

1.                              Is there a continuing need for the [Franchise Disclosure] Rule? Why or why not?

2.            What benefits, if any, has the Rule provided to prospective franchisees, including small businesses? What evidence supports the asserted benefits?

3.            What modifications, if any, should be made to the Rule to increase its benefits to prospective franchisees, including small businesses?

a.            What evidence supports the proposed modifications?

b.            How would these modifications affect the costs the Rule imposes on franchisors and franchise sellers, including small businesses?

c.             How would these modifications affect the benefits to prospective franchisees?

4.            What impact has the Rule had on the flow of truthful information and on the flow of deceptive information to prospective franchisees?

5.            What significant costs, if any, has the Rule imposed on prospective franchisees, including small businesses? What evidence supports the asserted costs?

6.            What modifications, if any, should be made to the Rule to reduce any costs on prospective franchisees, including small businesses?

a.            What evidence supports the proposed modifications?

b.            How would these modifications affect the benefits provided by the Rule?

7.            What benefits, if any, has the Rule provided to franchisors and franchise sellers, including small businesses? What evidence supports the asserted benefits?

8.            What modifications, if any, should be made to the Rule to increase its benefits to franchisors and franchise sellers, including small businesses?

a.            What evidence supports the proposed modifications?

b.            How would these modifications affect the costs the Rule imposes on franchisors and franchise sellers?

c.             How would these modifications affect the benefits to prospective franchisees?

9.            What significant costs, if any, including costs of compliance, has the Rule imposed on franchisors and franchise sellers, including small businesses? What evidence supports the asserted costs?

10.          What modifications, if any, should be made to the Rule to reduce the costs imposed on franchisors and franchise sellers, including small businesses?

a.            What evidence supports the proposed modifications?

b.            How would these modifications affect the costs the Rule imposes on franchisors and franchise sellers?

c.             How would these modifications affect the benefits to prospective franchisees?

11.          What evidence is available concerning the degree of industry compliance with the Rule?

12.          What modifications, if any, should be made to the Rule to account for changes in relevant technology or economic conditions? What evidence supports the proposed modifications?

13.          Provide comment on any overlap or conflict with other federal, state, or local laws, or regulations.

a.            What evidence supports any asserted conflicts?

b.            With reference to asserted conflicts, should the Rule be modified? If so, why or why not?

The questions posed by the FTC provide a chance for introspective of the Franchise Disclosure Rule and perhaps more particularly the Franchise Disclosure Document.  I would gander to say the Franchise Disclosure Rule and Franchise Disclosure Document (FDD) will not be abandon or eliminated by the FTC.  And, if the FTC did abandon the Rule, many states have enacted like statutes and regulations that mirror or greater than the federal FTC Franchise Disclosure Rule, and therefore, such abandonment will cause minor alteration the regulatory nature of franchising.