In 1952, a man from Corbin, Kentucky, sold a license to use his secret fried chicken recipe to a man in Salt Lake City, Utah. This transaction was the first in a series of events that saw a new Kentucky company become an international food empire. Colonel Harlan Sanders may not have invented the franchising business model, but his legacy demonstrates the economic opportunities available to a strong brand and a quality product.
It is interesting that the headquarters of one of the largest franchising entities is located in a state that just quietly passed legislation dramatically shifting the legal liabilities of corporate franchisors. Among the 100+ bills passed by the General Assembly this session, SB 151 is a game changer that few are talking about. Franchisors are no longer responsible for various violations of Kentucky employment laws committed by their franchisees, including violations of Kentucky's minimum wage laws, worker's compensation claims, unemployment insurance claims, violations of Kentucky workplace safety statutes, or discriminatory hiring practices. The relevant text is short enough to be copied in its entirety here:
Notwithstanding any voluntary agreement entered into between the United States Department of Labor and a franchisee, neither a franchisee nor a franchisee's employee shall be deemed to be an employee of the franchisor for any purpose under this chapter…
Not only are franchisors immune from the statutory violations committed by their franchisees, but this legislation may impact a franchisor's liability to customers injured by employees of franchisees. Ordinarily, employers can be held liable for the wrongful acts of their employees while the employee is acting within the scope of his or her employment. The legal doctrine is called “respondeat superior,” or literally, “let the master answer.” However, franchises are different business models than other corporate forms. A franchisor grants a license to a franchisee to use the franchisor’s trademarks and products in exchange for a fee, and the franchisee is considered an independent owner of the business at the licensed location. This makes respondeat superior a difficult question because it is unclear just who the master is.
When a person is injured by the negligence of an employee, that person is allowed to name the employer as a defendant and sue for damages. Typically the employer is in a better financial situation to pay a judgment than an employee working for wages. The bigger the employer is, the deeper the pockets go to pay for damages. In order to hold a franchisor liable for the negligence of a franchisee’s employees, Kentucky has adopted the "control or right of control" test. In Papa Johns Intern., Inc. v. McCoy, the Kentucky Supreme Court held that if a franchisor exerted enough control over the day-to-day operations of a franchisee, and the activity being controlled lead to the plaintiff's injury, then the corporate franchisor could be liable for damages.
Now that franchisors are immune from statutory employment violations of their franchisees, Kentucky has enacted policy explicitly designed to distinguish franchisors from franchisees. One could argue that as a matter of public policy, the "control or right of control test" has become obsolete. If franchisors are no longer responsible for injuries to employees of a franchisee under the workman's compensation statute, why should they be responsible for injuries to customers of a franchisee? For example, if a pot of scalding hot coffee is spilled, does it make sense for the franchisor to be liable when a customer is burned, but not the employee? In most cases, the injury can probably be compensated with the resources of the franchisee and its relevant insurance policy.
Overall, the new statutory regime may provide a good economic benefit to the Commonwealth. Now that corporate franchisors have substantially limited their liability in various areas of employment law, the corporate franchisor may grant more licenses than they otherwise would have. More licenses create new businesses and new employment opportunities for Kentuckians. More licenses can also lead to a chicken in every pot, and that is Finger Lickin' Good.
Are you interested in forming a business? The attorneys at Barsotti & Manley, PLLC, are dedicated to helping our clients choose the proper business form, and educate them on the requirements of keeping their business in good standing. Contact us today and let us help you get your business up and running.