USA Law and Practice Contributed by: David B. Ramsey and Michelle Murray-Bertrand, Kaufmann Gildin & Robbins LLP
clear lines between themselves and their franchisees with respect to control over employees, it increases their chances of defending against a joint employment claim. To complicate matters, in response to the uncertainty under federal law, in recent years some states have passed new regulations – in most (but not all) cas - es, in favour of franchisors, codifying a high bar for a franchisor to be deemed a joint employer in their state. These state-specific laws have resulted in a somewhat inconsistent patchwork of legal standards regarding who is a joint employer from state to state. 7.2 Vicarious Liability In the USA, a franchisor can be – but rarely is – held to be vicariously liable for loss and damage caused by the franchisee, whether by the franchisee’s acts or omissions, in certain circumstances, particularly where it is not made clear to third parties that the franchisee is independently owned and operated. In cases involving tortious conduct, breaches of con - tract, and consumer protection, some – but very few – court cases in recent years have held franchisors liable for franchisees’ acts or omissions. A number of cases have been brought against hotel franchisors due to acts or omissions of their fran - chisees, under the auspices of the Trafficking Victims Protection Reauthorization Act (TVPRA), a federal law that addresses labour and sex trafficking. Plaintiffs have claimed, under the provisions of that federal law, that the franchisors they were suing have vicarious liability as well as perpetrator liability and even benefi - ciary liability, for knowingly benefiting from and failing to prevent trafficking at their franchisees’ hotels. In at least some cases, courts have allowed such cases to survive the franchisor’s motion to dismiss, based on plaintiffs’ allegations that the franchisor controlled or mandated the franchisee’s property management and reservation system, and safety standards and policies, among other things relating to the means or methods by which trafficking occurred at the franchised loca - tion. On one hand, franchisors rely on the notion that a franchisee is an independent contractor liable for its own conduct, and not controlled by the franchisor. On
the other hand, a few recent vicarious liability cases indicate that courts are questioning that notion in some contexts. The primary legal theories for vicari - ous liability of franchisors are actual agency (when a franchisor has granted a franchisee the authority to act on the franchisor’s behalf) and apparent agency. In regard to actual agency, a franchisor requiring a certain standard of performance, or retaining the right to control outcomes, is not enough; the franchisor must retain control over the method by which those outcomes are achieved by a franchisee, or the fran - chisee must be a mere instrument of the franchisor, in order for the franchisor to be held vicariously liable for loss and damage to others caused by the franchisee. Courts will dissect the extent of franchisor control over the franchisee on a case-by-case basis to make this determination. For example, if a franchisor exercises pervasive control over staffing, cash handling, soft - ware systems, customer complaint procedures, or the franchisee’s hiring and firing of staff members, a court may find an actual agency relationship to exist. It is important for a franchisor to draw a clear line between optional guidance to the franchisee and enforceable requirements that the franchisee must follow. With increasing integration of digital technology between franchisors and franchisees, such as centralised POS software, supply chain software, mobile ordering, apps, websites and even data protection systems, the argument for franchisor control of the franchisee’s actions becomes stronger in some contexts. With respect to apparent agency, a franchisor may face vicarious liability if it creates the appearance that a franchisee is acting as the franchisor’s agent and a third party reasonably relies on that apparent authority to its detriment. The risk of vicarious liability of a franchisor is increased: • where there is a lack of clear provisions in a franchise agreement regarding the independent contractor relationship; • where there is a lack of using conspicuous signage and messages in advertising, internet platforms, and other means of disclosing to customers that franchisees are independent of the franchisor;
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