One of the essential elements of a successful franchise system is the franchisor’s ability to establish and uphold brand guidelines and standards. Franchise agreements typically grant franchisors significant control over various aspects of their franchisees’ businesses, from setting operational standards and requirements to establishing minimum or maximum pricing of goods and services and overseeing the system’s advertising.
However, franchisors should be aware of the potential risks of exercising significant control over a franchisee’s employment practices. Specifically, a franchisor that exerts “too much” control can be deemed a “joint” or “common” employer, which means the franchisor is legally considered to be the employer of the franchisee’s staff together with the franchisee.
A finding of common employer status exposes the franchisor to liability for employee protections and entitlements, including but not limited to, wrongful dismissal damages, human rights violations and wage and overtime class actions. This effectively shifts the franchisor from being a brand licensor to a direct employer, with the full range of legal obligations and financial consequences flowing from that role.
This article explores the key aspects of a common employer finding and outlines the potential pitfalls and mitigation strategies for franchisors seeking to evaluate their own internal practices and protect their business. Ultimately, there are ways to avoid a finding of common employer status, but doing so typically requires franchisors to forego at least some level of operational control. This is not an easy decision, as franchisors must balance the need to control certain employment practices to maintain brand consistency against the risk of being deemed a common employer. This is a highly individualized balancing act and should be assessed within the context of each franchisor’s unique model.