NEW CASE AFFIRMS POTENTIAL OF FRANCHISOR LIABILITY FOR FRANCHISEE'S ACTS OF DISCRIMINATION

A recent decision, Myers v. Garfield & Johnson Enterprises, Inc., 2010 U.S. Dist. LEXIS 3468 (E.D. Pa. Jan. 14, 2010), once again raises the potential liability of a franchisor for claims based on discriminatory conduct alleged against a franchisee.

Is a franchisor’s adoption of a systemwide code of conduct and provision of training to franchisees’ employees sufficient to establish franchisor liability?

At issue in Myers is whether a franchisor can be liable under federal law for sexual harassment of a franchisee’s employee allegedly perpetrated by the franchisee’s managers. The employee alleged that the franchisor provided her job training, issued a written code of conduct that prohibited harassment and discrimination in the workplace, and oversaw and approved all tax returns she prepared. The issue arose when the employee complained to one of the franchise owners that her supervisor had made repeated unwelcome sexual remarks to her. Her complaint, she claims, was met with additional harassment from the owner. The supervisor then allegedly followed up with even more harassment, including a performance evaluation suggesting that plaintiff “should experience what Nicole Brown Simpson did” and distributing that evaluation to other managers and supervisors. Allegedly, when the plaintiff complained about the evaluation, another owner responded that he had written up the supervisor, and then solicited plaintiff for oral sex. There was no allegation that the plaintiff ever reported the alleged harassment to anyone at the franchisor.

Franchisors may be “joint employers” with their franchisees or vicariously liable to franchisees’ employees.

The franchisor immediately moved to dismiss the claims against it, arguing that it did not employ the plaintiff, as specified in the franchise agreement, and therefore could not be liable as an “employer.” The plaintiff responded by arguing that the franchisor was potentially liable under three distinct theories: (1) directly as a “joint employer” with its franchisee; (2) vicariously as its franchisee’s actual principal under an agency relationship; and (3) vicariously as the plaintiff’s “ostensible or apparent employer.” Under the “joint employer” test, two otherwise independent entities are both considered an individual’s “employer” where both “exercise significant control” over an individual. Significant control, the court held, is measured by three factors: (1) authority to hire and fire, promulgate work rules and assignments, and set conditions of employment; (2) day-to-day supervision of employees; and (3) control over employee records. No one factor, however, is determinative. Based on the plaintiff’s allegations that the franchisor promulgated work rules by issuing a sexual harassment policy, engaged in day-to-day supervision by reviewing and approving each tax return she prepared, and assumed some control over employee records by providing a computer-based employee records system, the court held that she alleged sufficient facts to establish a potential joint employer relationship.

Relying on decisions from other jurisdictions, the court also rejected the argument that franchise relationships could not give rise to vicarious liability for discrimination claims. “Although the mere existence of a franchise relationship does not necessarily trigger a master-servant relationship, neither does it automatically insulate the parties from such a relationship.” By her allegations that the franchisor required the franchisee’s employees to undergo training by the franchisor, and required the franchisee to implement certain personnel policies and implement a code of conduct applicable to franchisees’ employees, the plaintiff had pled sufficient facts to support a claim that the franchisor had sufficient control over the very thing that allegedly resulted in the plaintiff’s injuries.

Finally, the court allowed the plaintiff to proceed with her apparent or ostensible agency theory. Recognizing that apparent authority must be based on statements of the principal, not the alleged agent, the court focused on the plaintiff’s allegations concerning communications she received directly from the franchisor, including the training and codes of conduct. Because these materials did not clearly distinguish between the franchisor and franchisee, the court held them sufficient, for Rule 12 purposes, to state a claim for apparent agency.

Franchisors must carefully evaluate how much control is truly necessary to protect the marks and system.

Myers is another example in a recent series of cases reviewing a franchisor’s potential liability as an “employer” of its franchisees’ employees. In Massachusetts, for example, the Supreme Court has held a janitorial services franchisor liable for unemployment taxes because it concluded that the franchisor was the franchisee’s “employer” and a federal court has certified a class of franchisees claiming to be employees of their franchisor. It also follows another recent case, EEOC v. Papin Enterprises, Inc., 2009 U.S. Dist. LEXIS 30391 (M.D. Fla. Apr. 7, 2009) and 2009 U.S. Dist. LEXIS 69787 (M.D. Fla. Jul. 28, 2009), that but for a failure of proof as to actual discrimination may have subjected a franchisor to Title VII religious discrimination liability. Indeed, cases challenging franchisees’ independent contractor status are now pending in multiple jurisdictions across the country where standards for establishing “employment” relationships are less stringent than the federal test applied in Myers. As a result, franchisors may wish to re-evaluate their franchise agreements and operations manuals to determine how much control they truly require to protect their trademarks and system with an eye towards lowering their risk of exposure to employment-related claims.

---
Nixon Peabody Franchise Law Alert, Feb 2, 2010.
Reprinted with permission.