What happens? Consumer trips and falls at a franchise store. Home owner complains that the franchisee’s work is shoddy and wants his money back. Franchisee’s employee alleges a failure to pay overtime.
More times than not, the franchisor gets sued along with the franchisee for these issues. It happened at the franchise location, but customers, employees, and others try to hold the franchisor responsible. This is referred to as vicarious liability. The franchise concept is vulnerable to vicarious liability, because;
The franchisor provides franchisee training about how to operate the business
The franchisor publishes an operations manual that has guidelines about operating the franchise business
The franchisee reports to the franchisor monthly
The franchisor provides the franchisee on-going consultation
The franchisor gets royalty on the franchisee profits
The Franchisee uses the franchisor’s software
The franchisor is usually bigger and has more money than the franchisee
What defenses does the franchisor have? Is it really equitable to hold the franchisor liable? If the consumer falls, should the franchisor pay? If the franchisee did a bad job, should the franchisor pay? If the franchisee does not pay its workers, should the franchisor pay?
In the case is Robert Leach et al v. Rafail Kaykov and J. Fletcher Creamer & Son, Inc., & Royal Dispatch Services, Inc., the court said NO, the franchisor was not liable. Rafail was a franchisee of the Royal Dispatch Services. He was a taxi driver. Mr. Leach had called Royal Dispatch Services for a tax ride. Rafail accepted the dispatch from Royal Dispatch Services. During the tax ride, an accident occurred.
The passenger, Mr. Leach, wanted to blame the franchisor Royal Dispatch Services. After all he called Royal Dispatch Services for the tax ride. And, Rafail was Royal Dispatches Services’ franchisee. And, Royal Dispatch Services, provides training to its franchisees, gives its franchisees a operations manual or rule book to follow, Royal Dispatch Services’ computer equipment is installed in franchisee taxis, the franchisees pay a commission to Royal Dispatch Services, and Royal Dispatch Services inspects the taxis.
The court said that’s nice, but Rafail is an independent contractor. Royal Dispatch is not liable. Rafail is free to accept dispatches from other persons. Rafail had to secure his own license and permits. Rafail did not have to accept the dispatch from Royal Dispatch Services.
It comes down to independence. Franchisees are independently owned and operated businesses. This is called out specifically in the franchise agreement. So long as the independence is respected and recorded, the vulnerability to vicarious liability is greatly diminished.
Lesson from the Court: Independence can free you from liability!
How does your franchise model recognize the franchisee independence? Are franchisees required to post that they are an independently owned and operated business? Are franchisees free to accept or reject consumer sales?