Franchisor Liability for Franchisee Conduct

Brenton Allen, Law Graduate, MST Lawyers

The franchising model is predicated upon duplicating a proven and successful business format that provides for the appearance of a single entity, when in fact each franchisee carries on their business pursuant to a contractual licence granted by the franchisor. The relationship between franchisor and franchisee is one akin to an independent contractor relationship, where each party is largely autonomous and responsible for the legal ramifications of their own conduct.  

However, a recent decision of the US National Labour Relations Board to name franchisor “McDonald’s, USA, LLC” as joint employer when issuing labour and wage violations against McDonald’s franchisees has attracted much interest into the applicability of vicarious liability into the Australian franchising system.

Vicarious liability is a legal doctrine that can render an employer liable for the conduct of an employee in certain circumstances. In the US, the doctrine can be imposed on a franchisor if they possess the right to control the day-to-day operations of the franchisee and this has led to franchisors regularly being held vicariously liable for the conduct of their franchisees. For example, in the US decision of Parker v Domino’s Pizza, a manual that oversaw the entire operation of the franchisee’s business was held to subject the Domino’s Pizza corporation to a vicarious liability claim in relation to a delivery driver who injured a third party in a car accident.

Australian law, on the other hand, has developed differently.  The notion of vicarious liability is tied strongly to the employer-employee relationship.  A franchisee seeking to impose vicarious liability on a franchisor will have great difficulty given that there is no direct employment relationship between the two.  Moreover, franchise agreements commonly include boilerplate clauses that often stipulate that the agreement will not constitute a partnership, joint venture, agency or employment relationship. As a result, Australian cases involving franchisor liability for the conduct of a franchisee are rare.

This position does not necessarily result in franchisors becoming entirely exonerated from the conduct of franchisees.  A franchisor that is negligent in selecting, training or supervising franchisees may be liable to a third party in a negligence action if the franchisor’s negligence was the attributable cause of the injury.

In WorkCover Authority of New South Wales v McDonald’s Australia Ltd, both the franchisor and franchisee were convicted under the Occupational Health and Safety Act 1983 (NSW) following the tragic death of a 19 year old casual employee who was electrocuted while cleaning a piece of kitchen equipment.

A franchisor that manufactures or supplies goods for a franchisee may also be liable if the goods are unsafe or unsatisfactory pursuant to the Australian Consumer Laws.  Similar statutory liability could be imposed on franchisors if a franchisee engages in misleading and deceptive conduct and the franchisor is ‘involved’ in the contravention.

For further advice on how franchisors can best position themselves to avoid being liable for the conduct of their franchisees, please contact our Employment Law and Workplace Safety team by email workplace@mst.com.au or by telephone +613 8540 0200.