Franchisor-Franchisee Independence and Joint Liability, Redux

As recently reported by BlueMauMau.org, the franchisor of the Tilted Kilt restaurant franchise system has recently been sued by several employees of its Chicago-based franchisee. The complaint arises out of alleged sexual harassment perpetrated by the franchisee himself.

Last year I wrote about franchisors being exposed to liability based on the conduct of their franchisees, but the issue is so important for all parties involved that several points bear repeating.

In the Tilted Kilt case, the franchisor allegedly published an “employee handbook” for franchisees to distribute to their staff, and exerted significant control over the operation of the franchised outlet in question. If true, these are two factors that typically weigh in favor of finding the franchisor to be a “joint employer” with its franchisee, thereby potentially subjecting it to liability for the alleged harassment.

Franchisors are supposed to provide support to their franchisees, and at its core, a franchise system is about building a cohesive, structured and predictable network of franchised outlets.

Even so, franchisors need to maintain an adequate degree of separation between themselves and their franchisees. Franchises are supposed to be “independently owned and operated,” and this is legally significant. Failure to maintain sufficient distinctions between the franchisor and the franchisee may result in the litigation situation presented in the Tilted Kilt case.

When preparing operations manuals, employment forms, and other documentation that you want your franchisees to use, do so in a way that requires franchisees to identify and maintain these distinctions. There are several effective ways to maintain uniformity and standards while also creating separation between franchisor and franchisee.

However, when a franchisor fails to impose adequate barriers between itself and the businesses carried on by its franchisees, customers, employees, and even the franchisees themselves may be able to make a colorable claim against the franchisor. If the franchisor doesn’t have documentation to back up its claim of independence (or worse, if there is documentation to the contrary), then it might just be faced with multi-party litigation.