EMPLOYER BEWARE: WHAT YOU DON’T KNOW CAN HURT YOU
by David G. Ross and Linda Hitt Thatcher

Does your franchisor seem reluctant to assist you with employee matters? If so, there’s a good explanation. The more involved the franchisor is with your employees, the more likely it is that a court will treat it like a second “employer” of those workers. And if there’s one thing that smart franchisors know about human resources, it’s that being an employer is a thankless job. Under both federal and state laws, employers are more likely than non-employers to be held liable for transgressions like racially discriminatory hiring practices, sexual harassment, and failure to pay overtime wages. Not surprisingly, then, your franchisor is probably taking great pains to avoid the “employer” label and leave the HR responsibilities to you.

Regardless of whether the franchisor succeeds in this endeavor – and it probably will – you could find yourself in hot water in the event that one of your employees files suit. Indeed, the law will always regard you as your workers’ employer, whether or not the franchisor is considered a “co-employer” or “joint employer.” This means that you’re always a proper target for an employment-based lawsuit. And not only can a successful lawsuit against you destroy your business, but an unsuccessful lawsuit could have the same devastating effect. Win or lose, litigation requires you to divert valuable time, effort, energy, and funds away from your business, and you won’t get those attorneys’ fees back.

But wait – it gets worse. Problems with your employees could also lead to problems you’re your franchisor. For example, it’s very possible that your Franchise Agreement contains a general “morals” or “conduct” clause. If the franchisor senses that your conduct toward employees puts it in danger of litigation or embarrassment, it might use that clause to find you in default or even terminate your franchise relationship. Further, in the event that the franchisor gets sued by one of your employees based on your alleged actions, it could (and undoubtedly will) successfully invoke the Franchise Agreement’s indemnification clause. This would require you to pay the franchisor’s legal fees and reimburse the franchisor for any judgment or settlement paid by it. So you need to avoid even appearing that you’re violating employment laws.

Protect Yourself

In order to protect yourself, you need at least a general, working understanding of your legal responsibilities. Employment-related obligations generally come from four sources: contract, federal statute, state or local statute, and court-made “common law.” The first, contract, is the rarest for franchisees, as contractual disputes usually arise only where the parties have a written contract. Most franchisees don’t enter into written contracts with their employees, and – absent legitimate concerns about an employee’s future competitive endeavors or use of trade secrets – they usually shouldn’t. Nonetheless, if you do use a written contract with your workers, make sure you know what it says and means. You’ll usually be bound by it.

Assuming that you don’t use a written employment contract, most jurisdictions will consider your employees to be “at will.” (You should learn the law in your particular state.) Employers are given enormous discretion to fire “at will” employees for good reasons, for bad reasons, for incorrect reasons, or for no reason at all. Employers are similarly given wide latitude with regard to decisions to hire, promote, or demote. In most cases, a court will simply decline to overrule your “business judgment,” even if it strongly disagrees with it.

This discretion is not absolute, however, as all employees – even those deemed “at will” – are subject to certain protections from other sources of employer obligations. Most of these protections arise from federal and state statutes. Some of these statutes prohibit employer actions that discriminate on the basis of certain “protected characteristics.” For example, Title VII of the Civil Rights Act of 1964 prohibits discrimination (including harassment) based on characteristics such as race, sex, national origin, and ethnicity, whereas the Age Discrimination in Employment Act and the Americans With Disabilities Act provide similar employee protections with regard to age and disability, respectively. Although many of you are not subject to these particular federal laws – which apply only to those employers that have a certain minimum number of employees – you should be aware of them. In short, states generally enact their own versions (some of which are more stringent than their federal counterparts) and apply them to all employers.

Other federal and state laws provide additional protections. For instance, one federal law protects military reservists from losing their jobs as a result of their military service, and other laws exist to protect the right to unionize. There are also federal and state statutes whose purposes are to ensure safe working conditions and timely (and full) payment of wages. Further, state courts sometimes recognize a non-statutory claim called “common law wrongful discharge.” Under the “wrongful discharge” doctrine, an employer might face liability if it terminates an employee in retaliation for reporting a suspected crime to the police or reporting other suspected wrongful conduct to a government administrative agency.

Unfortunately, this article can do no more than simply scratch the surface, as it is not possible to quickly and easily describe all of your employment-related legal obligations. The good news, however, is that you’re not required to become a legal expert. Just know that these issues exist and proceed with caution. Issue paychecks on time, and pay overtime wages when required. Try to create an environment in which people of both genders and all races, religions, and creeds feel welcome. Make your employees aware that discriminatory or harassing conduct by them will not be tolerated but that their own complaints about such conduct will be taken seriously, properly investigated, and remedied. In the event that a problem does arise – or if you simply need to discharge an employee but are concerned about legal consequences – speak to a lawyer who focuses on employment law so you can determine the most sensible way to proceed. It’s better to prevent problems from occurring, or at least prevent small problems from growing bigger, than to face far worse consequences later.

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Originally published in The Franchisee Voice, Vol. 13, Issue 2, Fall 2007.