Why is there a program about U.S. laws, especially labor ...



A QUICK LOOK AT UNITED STATES ISSUES OF INTERESTTO AUSTRALIAN FRANCHISORS AND THEIR LAWYERSbyRUPERT M. BARKOFFNATIONAL FRANCHISE CONFERENCE CANBERRA, AUSTRALIA9-11, October, 2016Why is there a program about U.S. laws, especially labor laws, at an Australian franchise CONFERENCEIn franchise disputes, usually the playing field is franchisors v. franchisees, either in individual disputes or in collective disputes.In contrast, in labor disputes, the franchisors find themselves on the same side with the franchisee community.There are many common labor and employment issues between the two countries.This outline will cover two of the more common interests. These, presented in reverse order of importance:Minimum wage regulation.Who is an employee and who is an independent contractor and the related question of when are company’s joint employers?What is the framework for labor regulations in the United States?Complicated.Federal and state regulatory systems.In most cases, the states are allowed to enact and enforce laws relating to labor and employment law matters so long as they provide more protection to employees than federal labor laws do.There are scores of statutes, both at the federal and state levels, dealing with labor problems. Some of the subjects include:Employee rights.Unionization.Occupational and safety matters.Wages.Taxation.Liability and allocation of risk of loss.Discrimination-racial, sex, national origin, religion.Terminations.Keep in mind that:The United States has fifty states, as compared to Australia’s six states and two territoriesThe population of the United States is in excess of over 320 million. The population of Australia is about 24 million.The economy of the United States last year was almost $18.0 billion; the size of the Australian economy was only $1.3 billion.The residents of the United States are more prone to litigation than are the residents of Australia (author’s opinion).Minimum Wage Laws.Both the federal government and state governments have enacted minimum wage requirements.Currently, the federal minimum wage law is $7.25 per hour.There are strong movements throughout the United States to substantially increase the minimum wage to $15.00 per hour.One of the groups actively driving this campaign is the Service Employees International Union.Generally, unions have fallen out of favor since the end of World War II. Less than 15% of the workforce in both countries are currently members of unions.Very low wages are particularly common in the restaurant and hospitality sectors of the United States economy. It is hard to compare the wages of U.S. restaurant and hospitality workers with those in the U.S. and the workers in those industries in Australia, because of the different customs of tipping.However, the recent strength of the United States economy has resulted in more employers willing to pay more than the minimum required wages because of job shortages in the number of job candidates.Several cities have enacted minimum wage laws. One of these is San Francisco, California where the minimum wage is supposed to increase to $15.00 on a schedule that favors small businesses over large businesses in the time schedule for wage increase.But the San Francisco ordinance is peculiar in that it separates large business from small business. A large business will be required to adhere to a faster increase schedule.For purposes of this ordinance, franchisees are included in the number of units of the employer for purposes of determining which compliance schedule is applicable. The International Franchise Association (i.e., the United States’ equivalent of the Franchise Council of Australia) filed suit claiming that this ordinance was unconstitutional because it discriminated against franchise systems.In 2015, the United States Court of Appeals for the Ninth Circuit affirmed a lower court’s decision that the ordinance was not unconstitutional. This result was not surprising in that the California courts, in general, are more inclined to protect the David against the Goliath.The Employee/Independent Contractor Controversy and Joint Employer IssueAs an opening note, the definition of “employee” and independent contractor will vary with respect to the legal question at issue. For example, there may be different definitions under federal and state tax laws relating to who pays the unemployment and social security taxes, and who may be directly liable for damages incurred that are applicable to a franchisee and possibly a franchisor.Joint employer and vicarious liabilityVicarious liability has been a legal issue in the franchise arena for many years. In the United States, vicarious liability is generally a judicial, not a legislative or administrative issue, that mostly deals with tort situations, where, in addition to the person who has committed a wrong, another person may also be liable for the tort because he, for the most part, controls the direct tortfeasor or the person who has committed the wrongful act, or the tortfeasor was his or her agent. A typical example would be a pizza driver causing an accident when he was working for XYZ pizza company.Joint employer liability can also involve vicarious liability, in the aggregate, but is generally based on the theory that two entities have, effectively, been the employer of the aggrieved party. Also, issues in joint employer cases can not only cover tort-type claims, but also claims dealing with unemployment, workers compensation and other tax issues, and overtime and other labor law violations, among other things.This issue has been particular noticeable in cases dealing with tax and labor or employment issues.If parties are deemed joint employers in the franchise context, then the franchisor will be liable to the aggrieved party to the same extent as the franchisee would be. So, if the franchisee does not pay its sales tax, the franchisor might have to pony up. Similarly, if the franchisee commits an unfair labor practice, both the franchisor and the franchisee may be equally responsible for the labor law violation.Historically, the test for whether there is joint employer liability centered upon control. If the franchisor could be deemed to exercise control over the franchisee, then the franchisor might be considered a joint employer. In a recent non-franchise situation, the National Labor Relations Board (“NLRB”) changed the rule of the game. It held that the joint employer test was not actual control, but the right to control, whether or not it was exercised. In reaching this decision, the NLRB also stated that there were no black and white rules, but one had to look at the entire situation before joint employer liability could be established. In the Browning-Ferris case, where a company subcontracted out certain responsibilities, including the management of the employees on the project, the court found that the contractor was also the employer of the subcontractor’s employees. However, in The Jade Group, Inc. v. Cottman Transmission Centers, LLC, a franchise case, the court ruled that there was not sufficient evidence that the franchisor should be deemed a joint employer.Most franchise agreements give to the franchisor the right to control certain decisions and conduct by the franchisee. For example, the franchisor will provide training for the franchisee, and the franchisee must attend the training class. If the training is not mandatory, however, it is only one factor to consider in making a joint liability determination. Other factors to consider might be attendance at conventions; assistance and controls in locating suitable premises for a bricks and mortar franchise; hours of operation; control over a franchisee’s hiring, pricing, marketing, wages structure, customer service and other activities. For the client and his lawyer, this facts and circumstances test to determine joint liability creates heartburn for a franchisor because of the lack of certainty it creates for businesspersons who like to make informed decisions. Moreover, it may well lead to what appears to be inconsistent results.Based upon discussions with scores of other franchise lawyers and the literature that has been generated by this issue, it appears that the “best practices” have been for franchisors, where possible, to modify their franchise agreements, franchise disclosure documents and operations manuals and other sources for franchisor to control franchisee behavior to turn control rights into suggestions. It is not clear that this strategy will work, but it is probably one way to avoid or at least reduce the probability of a joint employer result.Following such a strategy may have its pitfalls. Under United States trademark law, a trademark owner must maintain certain quality standards in order to protect its mark. If the franchisor fails to provide quality standards and enforce them, it has created what is known in United States parlance as a “naked license,” which might lead to a loss of trademark rights.Thus, the question becomes whether a franchisor has a greater interest in avoiding joint employer liability as compared to strongly protecting its trademarks.The problem is further complicated by the current political situation in the United States. If the Democrats prevail in the upcoming Presidential election, it is likely that the NLRB will continue to closely scrutinize franchise relationships and tend to take the more liberal approach and find franchisors to be joint employers. On the other hand, if the Republicans win the Presidential election and control the legislature, the pendulum is likely to swing in the other direction, but it will likely take a significant amount of time to effectuate this change in direction.I have suggested on several occasions, that if the Democrats win control of government in the upcoming elections, franchisors might do better to concede the issue of joint liability and, instead, use this as an opportunity to strengthen the franchisor’s trademark control (the Barkoff theory). Why?Most trademark lawyers take the position that brand is everything in the franchise context. When the brand is damaged by any event (a murder in a franchised or company store, or there is an e coli problem in a hamburger chain), the result can be devastating. Many years ago, a food borne illness affected a large portion of the Jack In a Box system (a hamburger chain located mostly in the northwestern part of the United States). It has been said that sales dropped by as much as 25% per unit for something in the neighborhood of several months (not only for Jack In a Box, but for other quick service restaurants in that part of the country. To most franchise companies, this would be disastrous and could quickly lead to insolvency, both for the franchisor and many of its franchisees. For the most part, while brand damage is not likely to be an insurable risk, liability to customers for direct damages can be an insurable risk.Thus, the franchisor has several trenches that protect it from direct damages. First, a franchise agreement’s indemnification provisions will provide that damages suffered by customers as a result of the franchisee’s misfortune would ultimately make the franchisee pay for direct damages. Second, franchisors can require franchisees to insure against these direct damages in case the franchisee cannot afford to or has inadequate insurance coverage. Third, the franchisor is likely to have its own insurance to cover direct damages if there is no other source to compensate the franchisor for any losses. And finally, if all else fails, the franchisor might have to dig into its own pocket to defend and settle claims resulting from the crisis. While none of these protections might cover the loss caused by damage to the brand, one would think that if the franchisor did a better job in controlling the delivery of its product or service to customers, the risk of loss to the brand would become lower. It is much like a situation involving a home burglar alarm. The existence of the alarm reduces the likelihood of a burglary.One other comment on joint employer liability: In the United States, the janitorial service industry seems to be the source of many of the problems. The analysis above remains the same when the franchisees are more than one-man bands. However, many of these operations consist of a franchisee with no capital, a mop and a bucket, and a list of customers, the initial ones having been provided by the franchisor. In this situation, the franchisor claims that the franchisee is an independent contractor, and not an employee of the franchisor. However, the difference between ‘ independent contractors and employees is also nebulous. United States companies have tried, almost whenever possible, to classify what looks more like employment situations as independent contractors relationship, in order to avoid having to pay unemployment, social security and workers’ compensation insurance of the franchisee or sales and other tax obligations. The Department of Labor has issued guidelines that attempt to point businesses in the right direction, but it is likely that only after the NLRB has successfully won judicial victories that support its view of the difference between independent contractor and employee status will businesses begin to question the advisability of taking a position adverse to government.CONCLUSIONSWhen viewed in its entire context, the only solutions to the joint employer and independent contractor/employee problems may be legislative. This might result in uniform national rules answering the myriad of questions that arise in these situations.While this is clearly a United States problem, often government policies in one jurisdiction may influence the policies of other governments. Franchise disclosure law is a classic case of this. The United States model of franchise regulations has served as a model for Australian franchise disclosure law. Thus, while Australian lawyers do not have to keep a close eye on the developing United States’ direction in joint employer liability, it would not hurt once in a while to take a peek at developments in the United States. ................
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