Labor Law Compliance for Franchise Owners

Franchise ownership can be a lucrative and rewarding venture, offering the opportunity to capitalize on a well-established brand and business model. However, along with the potential for success comes many legal responsibilities and challenges, particularly when it comes to labor and employment law.

Franchise owners must navigate complex laws and regulations to ensure compliance and avoid potential litigation. This article explores the essential employment legal issues that franchise owners must heed, including joint employer liability, worker classification, and wage and hour issues.

Joint employer liability

Joint employer liability occurs when two or more businesses share control over employment conditions, making them collectively responsible for complying with labor laws. In the franchise model, this liability arises when franchisors exert direct or indirect influence over franchisee employees, potentially exposing both parties to legal risks. If a franchisor is deemed a joint employer, it could be liable for wage and hour violations, unfair labor practices, discrimination claims, and other labor law issues at the franchise location.

To reduce the risk of being classified as a joint employer, franchisors and franchisees should take the following precautions.

Franchisors:

Limit control over HR decisions and avoid dictating wages, hiring, firing, and discipline policies.
Focus on implementing quality and customer service requirements, not specific employment practices.
Let franchisees develop their own HR policies and employee handbooks.
Avoid mandatory HR software and allow flexibility in scheduling, payroll, and tracking systems.

Franchisees:

Make employment decisions without franchisor involvement.
Keep payroll, scheduling, and compliance records independent from the franchisor.
Train managers on employment law to improve compliance with wage laws, anti-discrimination policies, and union rights.

Worker classification

Worker classification involves determining whether an individual is an employee or an independent contractor. This distinction is essential because employees are entitled to various protections and benefits under employment laws, while independent contractors are not.

Different legal tests may be applied to determine worker classification, depending on the jurisdiction and context. The most prominent rule is the U.S. Department of Labor (DOL) economic realities test, which sets forth six criteria for determining whether a worker is an independent contractor or an employee under the Fair Labor Standards Act (FLSA):

Opportunity for profit or loss: If a worker can make independent business decisions that affect their earnings, they are more likely to be classified as an independent contractor.
Investments by the worker and employer: Independent contractors typically make significant investments in their own tools and business operations.
Degree of permanency: A worker engaged in an indefinite or long-term arrangement may be considered an employee rather than an independent contractor.
Nature and degree of control: If a company significantly controls a worker’s schedule, supervision, and work processes, the worker is more likely to be classified as an employee.
An integral part of the business: If a worker performs services central to a company’s business model, they may be deemed an employee.
Skill and initiative: Independent contractors usually possess specialized skills and operate their own businesses rather than relying on a single employer.

Misclassifying an employee as an independent contractor can trigger serious legal and financial consequences for a business. Potential consequences include back wages and overtime plus liquidated damages equal to unpaid wages, effectively doubling backpay liability. Willful misclassification can result in additional civil money penalties.

Best practices to avoid misclassifying workers

Audit your current workforce and any independent contractor arrangements.
Check roles that involve long-term, core work for your business or that are subject to significant company control, which should likely be W-2 employees.

Wage and hour issues

Wage and hour laws are a significant concern for franchise owners, as noncompliance can result in costly penalties, back wages, and litigation. Key areas of focus include minimum wage, overtime, recordkeeping, and meal and rest breaks.

Minimum wage compliance

Franchise owners must pay employees at least the highest applicable minimum wage based on federal, state, and local laws. The federal minimum wage is $7.25 per hour, but many states and cities mandate higher wages. For example, California, Washington, and New York have significantly higher minimum wages that increase annually.

For tipped employees, the federal minimum is $2.13 per hour, provided that total earnings, including tips, meet or exceed the full minimum wage. However, many states require higher tipped wages or prohibit the tip credit system altogether, requiring employers to pay the full minimum wage before tips.

Franchise owners must also ensure that deductions do not bring employees’ pay below the minimum wage. Wage deductions for uniforms, cash register shortages, or other business costs can violate wage laws in many states. Employers should stay updated on local wage laws and regularly review pay structures to ensure compliance.

Overtime pay

Employees classified as nonexempt under the FLSA are entitled to overtime pay at 1.5 times their regular hourly rate for hours worked over 40 in a workweek.

Some states impose stricter overtime rules. For example, California requires overtime after 8 hours in a single workday and double-time pay after 12 hours. Some other states also have daily overtime requirements rather than just weekly calculations.

Common problems that franchise owners may face regarding overtime include misclassifying employees as exempt to avoid paying overtime, failing to count off-the-clock work (e.g., pre-shift setup, answering emails after hours, and post-shift duties), and failing to track remote work hours for hourly employees working from home.

Meal and rest breaks

Labor laws in many states mandate meal and rest breaks for nonexempt employees. While federal law does not require meal or rest breaks, many states have strict break requirements. For example, in California, nonexempt employees must receive a 30-minute unpaid meal break for shifts over 5 hours, with a second break after 10 hours and a 10-minute paid rest break for every 4 hours worked.

Many other states also have detailed break laws. Franchise owners must understand and enforce state-specific break rules and ensure that employees take their required breaks on time and have uninterrupted meal periods. If employees do work during their break, they should be compensated.

The failure to comply with meal and rest break laws can lead to penalties, wage claims, and class-action lawsuits.

Recordkeeping

Maintaining accurate payroll and time records is essential for wage and hour compliance. Under the FLSA, franchise owners must keep detailed records, including employee time records (hours worked, break times, and overtime), wage payment records (rates, deductions, tip credits, and bonuses), and payroll tax documentation.

Businesses generally must keep these records for at least three years, though some states require longer retention periods. Failing to maintain accurate records can result in penalties and increase liability in wage disputes.

Best practices for wage and hour compliance

To minimize the risk of wage violations, franchise owners should take proactive steps, including these:

Use digital time-tracking tools to accurately record hours worked and prevent off-the-clock violations.
Ensure all staff understand wage and hour laws, proper timekeeping practices, and the importance of compliance.
Monitor state and local wage and hour laws, and display the most recent versions of labor law posters in breakrooms or other common areas where employees gather.
Periodically review payroll records to identify and correct potential wage issues before they become legal problems.

Discrimination and harassment

Franchise owners must comply with federal, state, and local anti-discrimination laws, which prohibit discrimination and harassment based on protected characteristics such as race, color, religion, sex (including pregnancy, sexual orientation, and gender identity), national origin, age (40+), disability, genetic information, and veteran status.

Franchise owners must be aware of and comply with multiple federal laws:

Title VII of the Civil Rights Act of 1964: Prohibits discrimination and harassment based on race, color, religion, sex, and national origin
Americans with Disabilities Act (ADA): Requires employers to provide reasonable accommodations for employees with disabilities unless doing so would impose an undue hardship
Age Discrimination in Employment Act (ADEA): Protects employees 40 years and older from age-based discrimination
Equal Pay Act (EPA): Requires that men and women receive equal pay for equal work
Pregnancy Discrimination Act (PDA): Protects employees from discrimination related to pregnancy, childbirth, or related medical conditions
Uniformed Services Employment and Reemployment Rights Act (USERRA): Protects military service members’ jobs by ensuring they can return to work with the same seniority, pay, and benefits after military leave and prohibits discrimination based on military service
Genetic Information Nondiscrimination Act (GINA): Prohibits employers from using an employee’s genetic information in employment decisions

These protections apply to hiring, firing, promotions, pay, job assignments, and workplace policies. Failing to comply with these laws can result in lawsuits, government investigations, financial penalties, and reputational damage. Franchise owners face several high-risk areas that could result in legal liability:

Unintentional discriminatory hiring practices: Even neutral hiring policies (e.g., requiring a certain physical ability) can have a disparate impact on certain groups.
Failure to provide reasonable accommodations: Not accommodating religious practices (e.g., dress codes and scheduling) or disabilities (e.g., modified workstations and medical leave) can result in legal violations.
Allowing a hostile work environment: If harassment (e.g., racial slurs, sexual jokes, or bullying) is ignored or improperly handled, the employer can be liable—even if the harassment came from coworkers, managers, or customers.
Inadequate or inconsistent policy enforcement: Having anti-discrimination policies but failing to train managers or enforce consequences makes businesses vulnerable to legal action.
Retaliation against employees: Employers cannot retaliate against employees who report discrimination or harassment, even if the claim is later dismissed.

Keep in mind that many states and local governments have stronger protections than federal law, covering characteristics such as sexual orientation and gender identity, marital status, immigration status, credit history, and arrest records. Some also have pay transparency and anti-harassment policies.

Best practices for preventing discrimination and harassment

Franchisors may be liable as a joint employer if they exercise control over hiring, firing, or HR policies. To reduce legal risks and create an inclusive workplace, franchise owners should take these steps:

Create an employee handbook outlining workplace conduct, reporting procedures, and consequences for discrimination and harassment. Require all employees to acknowledge these policies in writing.
Train managers and employees on how to recognize, prevent, and report workplace harassment. Some states (e.g., California, Illinois, and New York) require annual anti-harassment training.
Offer multiple reporting options (e.g., HR and anonymous reporting systems) for reporting discrimination without fear of retaliation.
Investigate all claims immediately, thoroughly, and fairly. Take appropriate corrective action to prevent future incidents.
Monitor state and local compliance requirements to stay compliant.

Employee benefits

Franchise owners must navigate complex legal requirements to ensure health insurance, retirement plans, paid leave, and other benefits comply with federal laws such as the Employee Retirement Income Security Act (ERISA), the Affordable Care Act (ACA), and state-specific regulations.

For instance, the ACA requires certain employers to offer affordable health insurance to employees or face penalties. Franchise owners should determine whether they are subject to these requirements based on the size of their workforce. If a franchise has 50 or more full-time equivalent (FTE) employees, it must offer minimum essential coverage (MEC) to at least 95% of full-time employees (those working 30+ hours per week). Businesses with fewer than 50 FTE employees are not legally required to provide health insurance but may choose to do so to stay competitive.

If the franchise offers retirement plans, such as 401(k) plans, it must comply with ERISA and manage plan funds in the best interest of employees. It must also disclose plan information (such as fees, investment options, and contribution limits) and meet certain other requirements.

Some states require employers to participate in state-mandated retirement programs if they don’t offer their own plan. For example, California, Illinois, New York, and Oregon have auto-enrollment retirement savings programs for private-sector workers. Employers failing to comply with these state programs may face fines and penalties.

Paid leave and state-mandated benefits

While federal law does not require paid time off, many state and local governments mandate paid sick leave, paid family leave, and other benefits. Some states require employers to provide accrued sick leave for employees. A growing number of states, including Connecticut, Massachusetts, and New Jersey, require employers to participate in state-run paid family leave programs. And some states (e.g., Maine and Nevada) require employers to offer general paid leave that can be used for any reason.

Workers’ compensation insurance

Franchise owners must provide workers’ compensation insurance to cover employees in case of workplace injuries. Coverage requirements vary by state but typically apply to businesses with one or more employees. Failing to carry workers’ comp insurance can result in fines, criminal penalties, and lawsuits. Regularly update workers’ comp policies to reflect payroll changes and business growth.

Franchise owners should train employees on workplace safety to reduce injury risks and establish incident reporting procedures to streamline claims.

Best practices for employee benefits compliance

Provide employee handbooks and benefits summaries explaining benefits eligibility and enrollment.
Monitor changes in benefits laws.
Keep records of employee enrollments, benefit contributions, and compliance filings.

Workplace safety

Ensuring a safe and healthy work environment is not just a legal obligation for franchise owners—it’s essential for reducing workplace injuries, minimizing liability, and maintaining employee productivity. Many franchise operations involve fast-paced, high-traffic work environments that increase the risk of injuries. Common hazards include these:

Slips, trips, and falls
Repetitive motion injuries
Workplace violence and harassment
Burns and cuts
Electrical and fire hazards
Chemical exposure

Compliance with federal standards and state-specific safety regulations is critical to preventing accidents, illnesses, and costly penalties. The Occupational Safety and Health Act (OSHA) requires franchise owners to identify and mitigate workplace hazards. Depending on the industry, franchise businesses may be subject to specific OSHA standards, such as those for food service, retail, construction, or manufacturing.

General OSHA requirements include the following:

Providing a workplace free from serious recognized hazards
Ensuring employees have access to necessary personal protective equipment (PPE) as required for their role
Displaying OSHA workplace safety posters in visible locations
Maintaining records of workplace injuries and illnesses
Training employees on workplace safety protocols and emergency procedures
Conducting routine safety inspections and addressing potential hazards

Some industries, such as restaurants and retail, must also comply with specific OSHA guidelines related to fire prevention, safe handling of chemicals, ergonomics and repetitive motion injuries prevention, and slip-and-fall hazard prevention. And some states have occupational safety agencies that impose stricter safety regulations than federal OSHA standards. For example, California requires heat illness prevention measures for employees working outdoors, New York has enhanced protections for workplace injury reporting and safety training, and Oregon and Washington have workplace violence prevention rules for certain industries.

Workers’ compensation and employer liability

Most states require employers to provide workers’ compensation insurance to cover medical expenses and lost wages for employees injured on the job. Franchise owners should ensure compliance with state workers’ comp laws (some states require coverage for just one employee). They also need an injury reporting procedure to document workplace incidents. If an injury occurs, they should investigate and look for ways to improve safety procedures and prevent future accidents.

Best practices for safety compliance

Staying proactive about OSHA compliance, state safety laws, and workplace hazard prevention is essential for long-term business success and employee well-being. Here are key steps to take:

Develop a written workplace safety program that outlines safety procedures, emergency protocols, and reporting guidelines.
Conduct routine safety inspections to identify hazards before they result in workplace injuries.
Offer proper safety equipment, including first-aid kits, personal protective equipment, and fire extinguishers in all locations.
Train employees on hazard recognition, emergency response, and OSHA safety standards.
Encourage a culture of safety where employees feel comfortable reporting safety concerns without fear of retaliation.

Conclusion

Understanding and addressing joint employer liability, worker classification, wage and hour compliance, and other employment-related matters is essential to mitigating risks and ensuring a franchise’s success.

Franchise owners can create a compliant and thriving work environment by staying informed about legal developments and implementing best practices. To learn more about labor law compliance requirements, including poster requirements, check out our blog and the state-by-state resources on our website.