Franchise Agreement Changes for 2016



We are rapidly approaching the time of year when franchise systems complete their annual FDD updates.  When evaluating potential changes to the franchise agreement for 2016, prudent franchisors will consider not just the business implications, but also the relevant regulatory decisions and rulings from the prior year.

Unsurprisingly, many of the major rulings from 2015 concern the joint employer question that currently looms over the franchise industry.  At this time, a clear standard for determining whether a franchisor will be considered a joint employer of its franchisees’ employees has yet to emerge, but recent administrative and judicial decisions provide guidance that franchisors should contemplate as we await more clarity on this issue.

Most of the recommended franchise agreement changes clarify the nature of the franchise relationship and distance the franchisor from the employment decisions of its franchisees. These include: (i) ensuring that the training language in the franchise agreement is geared to protect the brand and franchisor’s marks, as opposed to controlling the day-to-day operations of the franchisee; (ii) revising the independent contractor language so that it explicitly states that the franchisor is not a joint employer of the franchisee’s employees; and (iii) including a clear requirement that franchisees post a sign at their location that they are an independently owned and operated business.  Equally important to incorporating new language is reviewing the existing agreement and removing any language indicating that the franchisor has the ability to exert control over the franchisee’s traditional responsibilities as an employer, such as hiring and firing or setting hours.

In addition to the joint employer issue, franchisors should consider the legal and regulatory effects of recent technological developments when updating their agreements for 2016.  Many franchise agreements contain language regarding customer data, and understandably franchisors are quick to assert full ownership of all customer information, so that it is easier to retain if the franchisee leaves the system. However, in the event of a data breach, these franchisors may find themselves responsible due to their ownership of the underlying data.  This tension is something that franchisors should consider when reviewing the applicable sections of the franchise agreement, and if franchisor want to retain control of franchisee data, they should strongly consider a review of their internal procedures for preventing a data breach. Additionally, systems where franchisees process credit card transactions should ensure that their franchise agreements include language that, at a minimum, requires franchisees to comply with the Payment Card Industry Data Security Standard (commonly referred to “PCI DSS”).

Each franchise system is unique, and a lot of these recent developments will be a game-changer for certain industries while leaving others untouched.  While some franchisors will wait until something goes wrong to change their franchise agreements, forward-thinking systems should annually review and proactively revise their franchise agreements to take into account legal, regulatory, and technological changes from the prior year.