Sick and Safe Time Ordinances Cause Concern in the Franchise Community

State and local governments around the country are passing legislation that continues to attack the franchise business model. Seattle’s enactment of a minimum wage law categorizing franchises as “large” businesses rather than “small” business is a much publicized example. Now municipalities are jumping on the trend of enacting legislation requiring employers to offer paid sick leave to employees. These laws are likely to impose financial hardships on small business owners who will need to provide paid leave benefits to employees. Like Seattle’s minimum wage law, the classification of franchises as joint enterprises or as large employers under paid sick leave laws will have significant effects on both franchisees and franchisors.

Saint Paul is the most recent municipality to enact a paid sick leave law that may harm franchisors and franchisees with units operating within the city. On July 1, 2017, St. Paul’s new earned sick and safe time (ESST) ordinance takes effect for employers and “integrated employers” with 24 or more employees, requiring employers to pay these benefits to employees working within Saint Paul’s city limits.  The legislation imposes a heightened threat because the rules governing the administration of the law (Rules) broadly include “a corporation with franchisees located in the City” as an example of an “integrated enterprise,” or joint employer, within its set of definitions. 

It is unclear whether city officials intended to broadly include franchisors as integrated employers under the new ESST ordinance or if its Rules were simply poorly drafted by a policymaker giving no consideration to the potential impact on franchisees operating within the city. While the definitions section of the Rules includes the language set forth above, the Rules also separately provide a multi-factor test for “integrated enterprise” liability:

The [Saint Paul] Department [of Human Rights and Equal Employment Opportunity] will determine the existence of an integrated enterprise by assessing the degree of control exercised by one entity over the operation of another entity. The factors in this assessment include, but are not limited to:

a.    Degree of interrelation between the operations
b.    Degree to which the entities share common management
c.    Centralized control of labor relations
d.    Degree of common ownership or financial control over the entities

This multi-factor test for joint employer liability is not unique, but the city’s decision to include “a corporation with franchisees located in the City” as an example of an integrated employer without regard for the multi-factor test, is remarkable. 

Franchisors and franchisees are advised to stay abreast of new paid sick leave legislation in relevant jurisdictions and provide input into the policymaking process if possible. Franchisors with franchisees in St. Paul are urged to submit questions for clarification on the ordinance to https://www.stpaul.gov/hreeo-esst-public-questions and to otherwise be aware of the heightened risk. Last, wherever located, franchisors should regularly audit their franchise agreements, operations manuals, content, and their practices to minimize their joint employer liability.