USA cases impose joint liability on franchisors and franchisees could this catch on in New Zealand

By Deirdre Watson, Barrister, March 2016

Whilst franchisees and their franchisors are often closely related in business, the traditional understanding of a franchise relationship is that the parties are very much separate legal entities. They are not joint venturers or partners, and nor is franchising an agency / principal relationship. Indeed, in most franchise agreements, lengthy clauses will spell as much out in some detail. Franchisors and franchisees share synergies in that the success of one is very much linked to the other, yet the two business are separate entities, both as to form and as to substance.

In New Zealand last year, a well-known franchise system came under attack when customers claimed from the franchisor amounts which were taken as deposits by a franchisee who never completed the work. The customers claimed they had no idea the business was a franchisor, and thought they were dealing direct with the franchisor business. The franchisor’s website did not contain any reference to the individual nature of the franchisees. And other than the name of the franchisee company on the invoices, there was nothing to communicate to the customers that they were dealing with anyone other than the franchisor.

The case highlighted an issue which is being increasingly litigated in the USA, namely, to what extent can a franchisor be liable for the acts of a franchisee? As with any emerging trends, it is only a matter of time before this sort of issue appears more frequently in New Zealand.

Increasingly, litigants in the USA have sought to make franchisors liable as joint employers[1]. That this is occurring in the USA, the home of franchising, and that the trend could potentially gain traction here in New Zealand would be news to many franchisors (and franchisees). In a recent line of “joint employer” cases, the nub of the argument for joint liability boils down to whether the franchisor has exercised control (either direct or indirect) over working conditions, or anything else to do with the employment or termination of employment of the employees of the franchisee.

It might seem immediately obvious to franchisors that they are not exercising control over their employee’s staff, but there is a fine line here. Franchise agreements and Operations Manuals need to be careful to ensure the franchisor is not unwittingly placing themselves in a position where they have the potential to exercise direct or indirect control. Ensuring that the franchisor’s name does not appear on employment documentation and other contracts, for eg references and employment contracts would also be important.

Given that the USA is a country that has often set trends and attitudes in franchising, NZ businesses need to gain an understanding of this trend, and ensure their businesses are structured in such a way that they will be free from attack.

Please note this article is not intended to be legal advice and pesons wishing to seek legal advice on their own situation should seek advice from their Solicitors accordingly.