The Hidden Liabilities in the Franchisor and Franchisee Relationship

For franchise owners or would-be franchise owners, there’s plenty to factor in when looking to take on new business. But before you plan for a new franchise expansion, it’s important to look at the various legal aspects. Franchisee business offers a great opportunity for business owners and entrepreneurs. However, without covering your liabilities, the level of risk only rises.

Franchise owners should carefully consider the legal risks behind owning a franchise and prepare with a well-constructed insurance policy. RMS Hospitality Group does offer the right policies business owners need to invest in the right amount of peace of mind through our Franchise Select program. Here are some of the liabilities franchise owners should be aware of.

Vicarious Liability

A franchisor can held liable for actions of a franchisee’s employees vicariously. Typically the law looks at the degree of control that the franchisor exercises over the franchisee’s operations. There is some leeway as some courts and agencies do not always use the same legal test to deem what control is.

When a franchisor creates something called an agency relationship, vicarious liability takes a front row seat. An agency relationship is when a franchisee and/or their employees exercise control over their activities, opening up a window of liability risks that are seemingly out of the control of the franchisor and which could bring on a world of legal setbacks.

To avoid the risk that comes with agency relationship liability, franchisors should start by insisting that all franchisees indicate that they are independent licensees. This can be done by adding this note thru advertising, signage, a letterhead, etc. Requiring that all franchisees and their employees are independent of the franchisor is an important step toward separating the acts and risks of the former.

Less Control Over Managers

In separating yourself from your franchisees and their employees, you have to give up absolute control. You may have certain goals for that business in mind, but that all stops once a franchisee, who may have other plans of their own, takes over. This could lead to an intense conflict and possible legal battles.

Franchisors make money by raking in a percentage of sales. This royalty comes from letting the franchisee use their brand name. Anything that results in boosting sales, but doesn’t produce profits has a good chance of resulting in conflict between franchisor and franchisee. Want to offer specials like coupons or sales deals? The franchisee may bar this from happening. Have an idea to expand on one specific franchise location? The franchisee may object.

When planning to open up a new wing of your franchise, be sure to consider everything from legal troubles that have to do with employee performance to giving up creative control to the franchisee. This can all possible alter your decision-making process.

About RMS Hospitality Group

At RMS Hospitality Group, our expertly crafted policies are written specifically for the hospitality industry. We offer custom tailored solutions to meet any venue’s specific needs. For more information, contact our knowledgeable experts today at (516) 742-8585.

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