Choosing the Right Franchise

Does a Franchisee Have to Follow Labor Laws?

A pizza franchisee in New York, the owner of five franchises, has found himself in hot water. Here are his transgressions:

  • He didn’t pay for fractions of hours, but instead rounded down hours to the whole hour.
  • He didn’t pay his delivery people overtime.
  • He didn’t reimburse drivers for their costs.
  • He had drivers do extra work while they waited for pizzas, even though they weren’t paid the minimum wage for making and boxing pizzas, work which isn’t covered by the tipped work exemption.

The court ordered this franchisee to pay more than $2,000,000 in back pay and fines.

We don’t know all the details of the case or why exactly the franchisee made the decisions he made, but the story has a good lesson for anyone considering becoming a franchisee.

First, you have to follow all the labor laws in your jurisdiction. Even though franchisors often include regulations in their training, you won’t be able to assume that your franchisor is on top of all the laws that will affect you. You will be held responsible. Make sure to find out all the laws you’ll need to know about before you choose a franchise. If you’re not sure you’ll be willing and able to follow the regulations affecting businesses in the industries you’re considering, that should be a red flag for you.

Don’t think you can avoid the laws because you’re a small business. In many jurisdictions, companies with just a handful of employees don’t have to follow all the laws. We asked a lawyer whether the laws had been written on the assumption that they were for family businesses. He looked dubious. “It’s not so much that the laws are different for family members,” he said, “as that family members are less likely to sue you.”

Whatever the reason, there are jurisdictions in which a company with two or three employees can do practically anything, including paying less than minimum wage. However, there are current court cases fighting about whether a franchisee, even a tiny one, can be considered a small business owner if she has a national franchise behind her.

For safety’s sake, assume you aren’t going to be considered a small business and that you will have to follow all the laws.

As for the idea that family members aren’t likely to sue, it wasn’t actually the employees who sued the franchisee in the story. He was sued by the State Attorney General, who interviewed employees after hearing about the workers’ mistreatment.

How can you find out about the labor laws where you will be in business? Use your favorite search engine to look for “Labor laws in YOUR STATE,” substituting the name of your state for the phrase “YOUR STATE.” Make sure you choose the official state website.

You’ll find that there are specific state laws. Arizona, for example, doesn’t have an overtime law as New York does. However, there are federal laws requiring overtime. That means that you must check federal as well as state laws to make sure you’re aware of everything you’ll need to know.

It’s a good idea to check with a lawyer, too, to make sure you’ve understood all your responsibilities completely before you sign your name to the franchise agreement.

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