Court Holds That Franchisor May Be Liable Under Title VII for Sexual Harassment Committed by Franchisee

In Myers v. Garfield & Johnson Enterprises, Inc., et al., 2010 U.S. Dist. LEXIS 3468 (E.D. Pa. January 14, 2010), a federal district court in Pennsylvania held that defendant Jackson Hewitt, Inc., the franchisor of co-defendant Garfield & Johnson, was potentially liable under Title VII of the Civil Rights Act of 1964 for sexual harassment allegedly committed by Garfield & Johnson managers. Rejecting the franchisor’s motion to dismiss for failure to state a claim, the court held that plaintiff’s joint-liability theory was plausible enough to proceed to discovery.

The complaint showed on its face that the plaintiff in fact worked for Garfield & Johnson and recognized at least by the time she received her first paycheck that Garfield & Johnson and the franchisor were separate entities. The court ruled as a matter of law that, under the allegations in the complaint, the franchisor and franchisee were not a “single employer” for Title VII purposes. The court nevertheless held that, if the allegations in the complaint were ultimately proven, the franchisor could be liable under two alternative Title VII theories, either as a “joint employer” or as an agent with actual or apparent authority over Garfield & Johnson’s hiring practices.

Both of these theories involve multi-factor balancing tests, with elements that overlap conceptually but are not congruent. It seems apparent from the decision, however, that the franchisor’s real problem under both theories, in the court’s view, was that if the allegations in the complaint were true, the franchisor had allowed excessive entanglement between itself and the franchisee in terms of both identification and operations. The court recognized that the franchise agreement disclaimed any employment or agency relationship between franchisor and franchisee, and specified that hiring, firing, and discipline decisions relating to the franchisee’s employees were the responsibility of the franchisee alone. The court pointed, however, to a number of factors alleged in the complaint that confused the issues of identity and operational authority despite these clear and express provisions:

• The franchisor’s policies concerning sexual harassment and other “workplace matters” applied to the franchisee
• The franchisee’s managers were required by the franchisor to undergo training and “obey all applicable laws”
• The franchisor’s “code of conduct” made no reference to the franchisee, referred to the reader as the franchisor’s employee, required that employee misconduct be reported to the franchisor, and required the franchisee to fire its own employees under certain circumstances
• The franchisor reviewed work done by the franchisee’s employees on a daily basisThe franchisor had “some degree of control over” the franchisee’s employee records
• The plaintiff was told (presumably by the franchisee) that she was “a Jackson Hewitt employee”
• The franchisor’s very insistence on adherence to standards of non-discrimination and diversity by the franchisee were indicia of control suggesting the possibility of joint employer or agent status
• The court also noted that the franchisee’s employees were directed to identify the business with the franchisor’s name, rather than the franchisee’s, when they answered the phone, although the court did not make it clear the analytic significance of this fact

What is particularly bracing about the court’s analysis is its recognition that these factors could trigger potential employer liability for the franchisor even though they were, in many cases, typical of the control exercised in any franchisor/franchisee relationship. The court said that if the standards for control and authority derived from common law principles for application in the Title VII context were met, the fact that they arose between a franchisor and franchisee and reflected the type of control that almost all franchisors exercise would not insulate the franchisor from liability.

Because the joint employer and agency tests involve multiple considerations with no single factor dispositive, it is not clear that any single contractual or operational step (short of drastically limiting the degree of control over franchisee operations that most franchisors feel is essential) could foreclose the potential for liability under this court’s view of the law. Reading between the lines of the decision, it seems possible the franchisor’s alleged practice of actually reviewing the work of the franchisee’s employees on a daily basis — something that most franchisors would probably be willing to avoid — might have been the tipping point for the court.

That, however, is speculative. Taking the decision at face value, it could be argued that, under Myers, franchisors find themselves between a rock and a hard place: The more closely they monitor franchisee employment practices, the greater the risk of their being subject to Title VII liability for the franchisee’s wrongful behavior. If they eschew monitoring of that behavior, they may be subject to Title VII liability anyway under other elements of the applicable tests, and will not be in a position effectively to regulate conduct that could result in statutory violations. On the other hand, if they do monitor the behavior and then take draconian measures in response to franchisee violations, they may trigger liability under state dealership or franchise protection statutes.

There may be specific steps franchisors can take to reduce, if not eliminate, their exposure under a Myers-type approach. Possibilities include:

• Avoiding frequent and close supervision of the work of franchisee employees on a regular basis
• Insisting that all employment-related materials given to franchisee employees — contracts, handbooks, policy statements, codes of conduct, and so forth — be franchisee-specific and perceptibly distinct from franchisor materials
• Requiring franchisees to identify themselves, in all interactions with the public (such as phone calls and customer contacts) by their own names rather than by a shorthand effectively limited to the franchisor’s name

There is no guarantee that these steps will result in bullet-proof protection (and they may have undesirable business ramifications that a franchisor feels far outweigh the risks of Title VII liability), but they should be carefully considered as they will at least provide a substantively meaningful basis for distinguishing Myers as the case law in this area continues to develop.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Contacts:

Michael A. Bowen
414.297.5538
mbowen@foley.com

Roberta F. (Bobbi) Howell
Chair, Distribution & Franchise Practice
608.258.4273
rhowell@foley.com