One of the most controversial topics affecting the franchise business model in recent years has been the “Joint Employer Issue.” The issue threatens to undermine the traditional relationship between a franchisee and its franchisor by imposing liability on the franchisor for wage and hour violations, and other claims, arising from a franchisee’s relationship with its employees.

In May of this year, the New York Attorney General, Eric Schneiderman, filed suit against Domino’s Pizza, Inc., Domino’s Pizza LLC and Domino’s Pizza Franchising LLC (“Domino’s”) accusing the companies of being joint employers with Domino’s franchisees and “turn[ing] a blind eye to illegal working conditions.” This is the first law suit where the New York Attorney General has alleged that a fast food franchisor is liable as a joint employer for the labor violations of its franchised stores. The Petition seeks recovery of at least $565,000 in unpaid wages for employees at ten stores in New York.

The petition filed by the Attorney General alleges, among other things, that Domino’s required its franchisees to install and use in their stores a software system for processing payroll know as PULSE. According to the Petition, Domino’s knew since 2007 that PULSE caused franchisees to chronically under-calculate the overtime pay rate for tipped employees under New York law. The petition also alleges that Domino’s is liable because its franchisees violated other aspects of New York employment law.

Under New York State Law, a company can be found to be a joint employer if it has control, or authority to control, employees in certain key ways. The petition alleged that Domino’s exerted such control by:

  • Directing franchisees to discipline and/or fire specific employees;
  • Dictating staffing and scheduling requirements for franchisee stores, as well as store hours;
  • Imposing exacting requirements for attire, appearance, grooming and conduct of franchisee-owned store employees, including restrictions on the diameter of earrings, color of undershirts, and permissible tattoos (military only);
  • Enforcing those standards through an intensive inspection regime, in which one Domino’s official told franchisee employees, “I’m the boss”;
  • Pushing an anti-union policy upon its franchisees, including sending Domino’s head of human resources to thwart a union campaign at a franchisee store; and
  • Requiring a franchisee purchasing stores from Domino’s, as a condition of the sale, to largely keep the prior staff (previously Domino’s direct employees) intact.

What are the implications for your business? Each franchisor may react to the threat of joint employer liability differently. Some franchisor may decide to effectively cease providing any advice or guidance to franchisees concerning any labor and employment issues to forestall the accusation that they are somehow controlling the relationship between their franchisees and their franchisees’ employees. Others may decide that the only way to manage the threat of potential liability for labor and employment violations of their franchisee is to systematize and control the process so that the franchisee effectively has no voice or latitude in employment decision making. Neither tact is optimal for most franchisees who both desire guidance and support from their franchisor on labor and employment issues but do not want to cede to their franchisor the right to make important decisions that affect their business. Franchisees should carefully monitor their franchisor’s effort to amend provisions of the franchise agreement or to unilaterally effect changes to the Operations Manual to attempt to shift potential liability associated from the “Joint Employment Issue” from the franchisor to its franchisees.

We will be watching this case, and other cases involving the “Joint Employer Issue,” closely and report on developments that potentially may affect NYFA members and their businesses.