Franchise Bulletin: March 2015 - Can a Franchisee be liable for the acts / ommissions of its franchisees?

It has long been established in English law that a franchisor is not liable to third parties for the acts or omissions of its franchisees. Ultimately whilst the relationship between a franchisor and franchisee is fiduciary - the franchisor has no direct relationship with the franchisee's staff. Instead the employer will be the franchisee.

This principle which is fundamental to the nature of a franchise has been broadly speaking accepted throughout the world and reflected in the laws of not only England but other jurisdictions. It is also enshrined in the franchise contract which clarifies the responsibilities of the franchisor and franchisee.

A recent US case has however created uproar in finding McDonalds jointly responsible with its franchisees for employment law infringements including the firing, suspension and reduction of hours of franchisee employees that belonged to trade unions. Considering the size of McDonalds franchise network the impact of this decision is huge.

Disgruntled franchisee staff now have a defendant with much deeper pockets to target, and McDonalds has overnight become an employer of thousands. McDonalds is challenging this decision.

If this decision stands the impact for retail franchisors (in the US) is considerable. If franchisors can be liable to franchisee staff then arguably can they not also be liable to other third parties - franchisee customers? Franchisee contractors - the list goes on.

UK businesses that franchise in the US should be mindful of this decision. UK franchisors that operate franchises from the US should also take heed in case this decision impacts on their businesses - (which will depend on what law applies to your franchise contract).

Whilst there are no signs that English law will follow this principle at present it would still be prudent for franchisors in England to minimise their risk by ensuring that their franchisees implement employment policies and practices in line with applicable English employment laws. Employment actions are time consuming and attract negative publicity for the brand, plus with the growing trend in English courts for implying responsibility beyond that contractually prescribed between parties (as shown by the recent slew of good faith cases) Franchisors in England should note the unfortunate position of McDonalds and review the practices of their franchisees accordingly.

The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.