Uh-oh, Could You Be Legally Liable For Your Franchisees’ Actions?

As a franchisor, one of the most critical aspects of your business model is the ability to maintain control over your brand, products, and services while simultaneously granting franchisees the autonomy to operate their individual units.


However, this delicate balance can sometimes be disrupted by the actions of franchisees, potentially exposing you to legal liabilities. In this blog post, we’ll explore the circumstances under which a franchisor could be held responsible for the actions of their franchisees.

“In the ever-expanding universe of matters that may keep franchisors up at night, concerns about their potential vicarious liability for the actions of franchisees or their employees likely tops the list.”


Franchisors and Vicarious Liability for Actions of Franchisees or Their Employees

Kilpatrick Townsend & Stockton LLP

Here are some relevant cases and considerations regarding franchisor liability for franchisee actions in New Zealand, Australia, the United Kingdom, and the United States:


In the US, there have been numerous cases where franchisors were held vicariously liable or as joint employers due to the level of control exerted over franchisees, such as the McDonald’s hot coffee case (Liebeck v McDonald’s Restaurants) and the Holiday Inns security case. And of course, McDonald’s Corp was brought to the table by the National Labor Relations Board and was only absolved of any joint liability for labor law violations committed by its franchisees after a settlement was reached.


While New Zealand does not have franchise-specific legislation, the general principles of agency law, negligence and breach of duty could expose franchisors to liability for franchisee actions. Factors like operational control, training requirements and marketing practices influence the risk. Franchisors have had to fight for the rights of their franchisees under changes to employment law which appeared to discriminate against franchises. The collaborative activity exemption in New Zealand’s amended Commerce Act may provide some protection for franchisor-franchisee territorial allocations and restraints.


Australia’s Franchising Code of Conduct explicitly requires franchisors and franchisees to act in good faith, potentially increasing franchisor liability. While not a very recent case, WorkCover Authority of New South Wales v McDonald’s Australia in respect of the death of a franchisee employee electrocuted on McDonald’s premises highlights the increased risk of liability when franchisors lease to or supply their franchisees.


While legal principles and theories do exist under which a franchisor in the United Kingdom could potentially be face liability claims for franchisee actions, it is evident that such claims against franchisors face significant hurdles under UK law - as they do under New Zealand and Australian law - compared to the United States legal system.

But while you may not be losing sleep now, it would certainly pay to minimise the risk of “the ever-expanding universe of matters that may keep franchisors up at night” by taking these measures: 


  1. minimise the actual control exercised by a franchisor over a franchisee and its employees
  2. carefully draft the franchise agreement to retain control over only those matters that are necessary for the successful operation of the business
  3. provide ample discretion to the franchisee over employee and other local operational matters
  4. publicly acknowledge that franchisees operate independent businesses and encourage franchisees to make that clear to the public
  5. consider insurance coverage for such liability and mandating franchisees maintain such coverage for the benefit of the franchisor

Please note that I am a franchise consultant, not a lawyer, and none of the text above is intended or should be construed as legal advice. However, I do work with some excellent specialist franchise lawyers and recommend that you consult with them on franchising legal matters rather than a non-specialist.


I am able to offer you my expertise in all other aspects of franchising and business scaling, including business model innovation, systems development, coaching and mentoring, speaking and franchisee recruitment.   

Every week, I produce an email newsletter containing news, insights and information of value to franchisors, licensors and those considering or involved in scaling their businesses. Subscribe here or follow me on Linkedin, X or Facebook so you don't miss anything important!


If you are considering franchising your business or developing your existing franchise or licence system, I invite you to contact me to arrange a Free 30-Minute Initial Consultation.   


 

Share on your Page:

Follow us:

by Robin La Pere 23 January 2025
As a franchise consultant, I’ve had the privilege of working with brands that are reshaping industries and challenging the status quo. From the adoption of groundbreaking technologies to the reinvention of traditional franchise agreements, the past year has been a proving ground for innovation. As we step into 2025, the question isn’t just about keeping up—it’s about leading the charge. Let’s explore what the future holds and how some of the most innovative franchises are already paving the path to success.
In 2024, a raft of new laws and regulations came into force which impact the franchise model
by Robin La Pere 14 January 2025
New laws and regulations came into force in 2024 which will affect the franchising industry, both directly and indirectly, and may lead, in the words of McDonald's corporate and franchisees, to "destruction of the franchise business model"
by Robin La Pere 11 December 2024
$8 billion. That's the jaw-dropping amount that Blackstone private equity just paid for Jersey Mike's, a submarine sandwich franchise with just 3,500 stores.
Has Jaguar made a mistake with its recent rebrand? Or was it their intention to stir up controversy?
by Robin La Pere 27 November 2024
Jaguar's recent rebranding announcement has stirred up fierce criticism and even ridicule. Critics say Jaguar has thrown its iconic brand heritage into the toilet and come up with a new brand image that distances it from its traditional market but seems to alienate new markets.
by Robin La Pere 26 November 2024
Meet Sarah. She’s the owner of a boutique business in Auckland specialising in handcrafted, eco-friendly candles. For years, Sarah’s website thrived, attracting customers searching for ‘sustainable candles in New Zealand.’ Her engaging blog posts on candle-making and sustainability consistently ranked high on Google, driving steady traffic and sales. But recently, everything changed.
by Robin La Pere 24 November 2024
If you’re not up with the latest on 102-year-old brand remakes, then you’ll never guess whose rebranding pre-launch teaser this is part of. The whole video clip may help.
by Robin La Pere 13 November 2024
Donald Trump hasn’t yet taken his place as the 47th president of the United States, but he is already starting to make his mark again on world politics and economies.
by Robin La Pere 6 November 2024
This guy has, in my opinion, revolutionised the franchise industry with his unique approach to strategic franchisee recruitment and responsible franchising practices. Just last year, Aaron Harper, CEO and Owner of the Rolling Suds Franchise, awarded franchises for 59 territories across 16 US states, transforming the business into one of the world's largest power washing franchises. Here's how he's done it. Educational Videos: Harper shares real-time business strategies through educational videos on social media, offering insights into responsible franchising and business growth. Social Media Engagement: He maintains an active presence on platforms like LinkedIn and Twitter, posting daily content that discusses franchising best practices and industry trends. Podcast Appearances: Harper regularly participates in podcasts, sharing his journey and expertise in franchising, thereby reaching a broader audience. Keynote Speaking Engagements: He delivers keynote speeches at industry events, discussing topics such as responsible franchising and business development. Media Features: Harper has been profiled in top-tier media outlets like Entrepreneur, Authority Magazine and Franchise Dictionary Magazine, enhancing Rolling Suds' visibility. YouTube Content: He creates informative videos, such as explaining the franchise sales process to educate potential franchisees. Sometimes he seems to give away his 'trade secrets', which could easily fall into the hands of his competitors or inspire would-be franchisees to start their own independent power washing businesses. But Harper believes that his powerful branding, comprehensive end-to-end operating systems and his strong team approach add more value to prospects than going it alone. Getting the help of seasoned professionals: Because Harper's background is in a different industry than property maintenance and he was unfamiliar with franchising before acquiring Rolling Suds, one of the reasons for his rapid success was to engage the services of professionals who assisted him in combining his own vision, values and skillsets with those needed to build and grow a thriving franchise organisation. 
by Robin La Pere 5 November 2024
Picture this: A prospective franchisee, excited about the possibility of joining your franchise, opens your Franchise Disclosure Document (FDD) for the first time.  But instead of finding an engaging, informative document that fuels their enthusiasm, they’re faced with a wall of dense, complex text—a 100-page monolith that feels more like a legal maze than an opportunity.
by Robin La Pere 30 October 2024
Every few years, surveys surface that claim to offer a snapshot of the franchising landscape in different parts of the world. These reports are often filled with glossy graphs and impressive numbers like the one below.
by Robin La Pere 22 October 2024
Team New Zealand's stunning victory in the 2024 America’s Cup has become a source of inspiration far beyond the world of yacht racing. The principles that led them to success on the water can serve as powerful lessons for businesses looking to excel in 2025. Here’s what we can learn from their win to help drive success in the competitive business landscape. 1. Innovation as a Game-Changer Team New Zealand is known for pushing the boundaries of yacht design, constantly innovating to gain a competitive edge. Their 2024 victory was fueled by their cutting-edge technology, particularly in aerodynamics and hydrofoil design. In business, innovation is equally critical. Companies that embrace new technologies, from AI to automation, stand to gain the upper hand by improving efficiency and creating value in ways their competitors can't. Lesson for business: Invest in research and development and stay ahead of industry trends. Whether you're a franchisor looking to enhance operational efficiency or a startup exploring new markets, leveraging innovation is crucial to staying competitive. 2. Adaptability in the Face of Challenges In the unpredictable world of sailing, adaptability is key. Team New Zealand faced shifting winds, currents and tough competition, yet they adjusted their strategy on the fly. Similarly, businesses in 2025 will need to stay agile, responding quickly to changes in the economic environment, consumer behavior, and emerging technologies. Lesson for business: Build an organisational culture that thrives on flexibility. Encourage teams to experiment, pivot when necessary, and be open to rethinking strategies to stay resilient in dynamic markets. 3. Teamwork and Leadership While technology and innovation are important, Team New Zealand’s success also came down to their strong leadership and cohesive teamwork. Every crew member had a specific role, but it was their ability to work seamlessly as a unit that truly set them apart. The leadership team created an environment where each member could thrive and contribute to the collective goal. Lesson for business: Foster a collaborative work environment where every employee understands their role in the bigger picture. Strong leadership, clear communication, and a shared vision can align your team and ensure everyone works toward common goals. 4. Precision and Execution Yacht racing at the America’s Cup is all about precision—split-second decisions, perfect maneuvers and flawless execution. Team New Zealand's ability to execute their strategy with laser focus enabled them to edge out their competitors. Similarly, in business, having a strategy is only half the battle—success comes down to how well you can execute that strategy. Lesson for business: Prioritise operational excellence. Whether it's improving supply chain management, enhancing customer service or optimising your franchise system, ensure that execution aligns with strategic objectives for long-term success. 5. Staying Calm Under Pressure The high-stakes environment of the America’s Cup puts immense pressure on teams to perform. Team New Zealand's composure during tense moments allowed them to make smart decisions when it mattered most. In business, the pressure of deadlines, competition, and market shifts can be equally overwhelming, and maintaining focus is essential to making the right choices under stress. Lesson for business: Cultivate a culture of resilience. Train your team to handle pressure calmly and methodically. This will not only improve decision-making but also keep morale high in challenging times. 6. Working with the Best to Sail into 2025 with Confidence Team New Zealand's win was its record-breaking third in the America's Cup. New Zealand is only a small and geographically isolated nation compared to all of the other competitors in the iconic race. To me, their victory was a testament to any nation's—or business's—ability, no matter how small, to draw on the best people in their fields into their team. The Team New Zealand team was made up not only of world-class designers, boat builders and sailors, but some of the best in their fields outside the realm of yacht racing. For example, one of the team's cyclors was Hamish Bond, who was not a champion cyclist as you might expect but an Olympic gold medalist in rowing. Just as Team New Zealand's innovative, adaptable, and team-driven approach led to their triumph in the 2024 America’s Cup, businesses can draw on these same principles to navigate the complexities of 2025. I have a passion—backed by expertise and experience—for helping businesses like yours with the strategic vision, systems, people and flawless execution to win the future. Contact me to get started with a free Initial Consultation .
by Robin La Pere 22 October 2024
As we approach 2025, the franchising industry stands at a crucial crossroads. Following years of economic uncertainty, shifting consumer behaviours and adaptation to post-pandemic realities, indicators suggest that 2025 could mark a significant turning point for the franchise sector.
More posts