Ask a growing franchisee to name its number one business issue and it’s likely that the answer will be simple: hiring and managing staff.

Employment issues are far from simple, so franchisees often look to franchisors for help. Franchisors have much to offer in the way of guidance but often struggle to balance a desire to give franchisees the tools and information they need to be successful employers with the need to remain independent of the employer/employee relationship. The good news for both franchisees and franchisors is that this goal is within reach.

Traditionally, the question of whether a franchisor could be held liable for the employment practices of its franchisees depended upon whether the franchisor was the legal agent of the franchisee and/or a joint employer of its employees. In the past, many franchise arrangements addressed these issues by specifically shifting the responsibility for all employment decisions to the franchisee and allowing the franchisor to take a hands-off approach.

While this might have been the easiest way to assign risk, it was not always the best way to deal with the underlying employment issues, and it left less experienced franchisees unable to take advantage of the franchisor’s knowledge and experience.

As employment law has evolved, the risk of potential liability to the franchisor under this type of arrangement has increased. In particular, a number of state anti-discrimination laws (such as those of New York, New Jersey, and California) impose liability upon third parties for aiding and abetting discrimination. Even where a franchisor takes a completely hands-off approach with respect to the franchisee’s employees, it may still face potential liability where it knowingly tolerates or condones discriminating practices.

In practice, this now places franchisors in a Catch 22 position. If a franchisor knows of discrimination by the franchisee but fails to act, liability as an aider/abettor may result. Conversely, if the franchisor does take action, that action itself may lead to the imposition of liability as an agent and/or joint employer. This is further compounded by the fact that the size of jury awards and the willingness of juries to give large awards has also increased over the last few years.

Despite these issues, franchisors can help franchisees, particularly by assigning responsibility for employment practices and providing guidance to help identify compliance issues. Franchisees can consider additional protections such as conducting compliance audits to help tackle tricky employment issues.

A good franchise agreement should assign the responsibility for employment practice issues to the franchisee. After all, the franchisee is the one running the day-to-day operations. The franchisor should not mandate particular employment policies or get involved in individual employment decisions.

At the same time, the franchisor should provide the information and resources necessary for the franchisee to fulfill its role as the employer. At the outset, the franchisor should affirmatively require that the franchisee ensure compliance with all applicable employment laws.

It should also be prepared to take corrective action in those situations where the franchisee is not complying with the law. In that way, the franchisee remains free to structure its employment practices according to its business plan.

Where state or federal law provides employers with a choice with respect to a policy or practice, the decision will rest with the franchisee. At the same time, the franchisor can ensure that all mandatory legal requirements are met, thereby retaining a role in protecting its brand/good name from potentially damaging employment actions.

Where the parties agree on this type of apportionment of risk/responsibility, it is imperative that employees not be confused as to who is the employer. Because of the uniformity and branding considerations associated with a franchise, it is often difficult for the public (and even the employees) to distinguish between the franchisor and the franchisee. As a result, the written materials posted at the workplace and/or distributed to the employees should make clear that the franchisee (and not the franchisor) is the employer.

Although franchisees should consult their own employment counsel in establishing and reviewing policies and in dealing with particular claims, the franchisor also should provide general information and guidance. Even simply helping franchisees identify those issues which they need to address can go a long way towards heading off problems.

In fact, many franchisors provide training/seminars on relevant issues as a service to their franchisees. For example, Jackson Hewitt, the nation’s second-largest individual tax preparation company, periodically surveys its franchisees to determine what issues are of most concern to them. It then retains independent employment counsel to provide seminars on those topics at its annual franchisee convention.

The company also follows up with a post-seminar survey to ensure the training is effective and responsive to their concerns. Training on such things as how to properly interview and hire employees, what to watch for in dealing with discipline/discharge issues, and how to conduct investigations of employee complaints are particularly helpful to franchisees.

Employee training and posting requirements also should be addressed by both parties. Federal and many state laws require that employers post information summarizing the applicable employment laws on such issues as harassment/discrimination, wage and hour regulations, whistle-blowing, and workplace safety.

A recent visit to a franchise to interview witnesses with respect to a race discrimination charge revealed that there was not a single required posting on the employee bulletin board. When questioned, the franchise owner simply said, "(The franchisor) never told me anything about that."

Nor had the lawyer who represented him on the purchase of the franchise. As a result, the franchisee’s simple failure to make the required posting was used against it as evidence of its alleged discriminatory intent.

For their part, franchisees (especially first-time employers) should not rely solely upon the franchisor for information. Nor should they rely solely upon off-the-shelf forms or how-to books in establishing or reviewing their employment practices. Because of variations in state and local laws as well as the constant developments in the law, such materials often contain errors.

A comprehensive Employment Practices Audit is the best way to get a handle on whether the business is complying with applicable employment laws and identifying potential areas for improvement. The audit should review everything from hiring and disciplinary policies and procedures to payroll procedures. All written materials such as job applications, handbooks, and leave/benefit policies also should be reviewed.

To help avoid employment practice claims, franchisees also should make sure that their employees are properly trained. A number of states (including California and Connecticut) require employers of a certain size to provide anti-harassment and other training to all employees.

Even where such training is not required by law, it can provide a limited defense in the event of a discrimination or harassment lawsuit. As a result, even where the franchise agreement is silent on the issue, franchisees should determine whether training is required.

Since even the best efforts and policies cannot guarantee that a lawsuit will not be filed, the franchisee should consider further protection. The cost of defending even a straightforward discrimination case can mean the difference between having a profitable year or not.