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The Franchise Arena – A Thought Leader Navigates Top Industry Issues

Second Quarter 2015

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INTERVIEWER: Kelly O’Callaghan, partner in CohnReznick’s Hospitality Industry Practice

Kelly O’Callaghan has more than 20 years of diversified public accounting experience with a concentration in auditing, IT audit, and accounting. She leads the Hospitality Industry Practice in CohnReznick’s New Jersey offices. 

INTERVIEWEE: Justin M. Klein, Esq., Partner, Marks & Klein, LLP and Founder of Garden State Franchise Association

Justin M. Klein is considered one of the leading franchise and business attorneys in the United States. As the managing partner in the nationally recognized firm of Marks & Klein, LLP, Justin’s practice focuses on all aspects of the franchise relationship: from negotiation, acquisition and expansion, to litigation.

Q: What are the top three issues that franchisors and franchisees are dealing with in the current market?

A: Although it’s difficult to narrow it down in order of importance to just three issues that stand out among all the various issues that franchisors and franchisees are dealing with in the current market, three prominent issues today include:

  • Rising costs relating to increased healthcare and minimum wage requirements and the impact on the bottom line and expansion.
  • Vicarious liability is always a major concern. In light of recent court decisions or government agency determinations relating to franchisor control over franchisee operations, it is an extremely relevant issue in the current market.
  • The relationship between franchisors and their franchisees as the economy continues to strengthen and improve from the recession conditions of the last several years.

Q: What solutions do you offer to your clients to deal with these issues?

A: There is no silver arrow when addressing concerns affecting the economics of the franchised business – but education and communication are two key elements that can put franchisors and franchisees in the best place to work through issues as they arise. Simply put, organizations should comply with government regulations and we encourage them to plan for the implementation of compliance well before the regulations become effective.  Knowing and understanding what is coming down the pike can help franchisors and franchisees better prepare for the economic effects. It is important that franchisors and franchisees are aware of state or federal laws that may affect their businesses, to create strategies to deal with those changes from a legal perspective, and to make sure the right team is in place to ensure success from a business perspective as well.

Vicarious liability has always been a hot topic in franchising. In the current market, due to outside pressures from some government agencies and creative plaintiff’s lawyers, franchisors and franchisees may see an uptick in lawsuits filed against them seeking direct liability against the franchisee and vicarious liability on the franchisor. This is all the more reason for franchisors to review their operations manuals and operating procedures to analyze not only the control they exert over their franchisees, but how they are monitoring the areas in which they do exert substantial control. Likewise, franchisees should review their operating procedures and create checks and balances (if not already in place) to ensure compliance with the laws and regulations to minimize potential exposure to liability. Likewise, franchisees should be sure they have all the proper insurances in case a lawsuit is brought against them. Franchisees need to be sensitive to the fact that if their conduct results in a lawsuit, and the franchisor is sued as well, the franchise agreement requires the franchisee to indemnify the franchisor or cover its costs of litigation in addition to bearing the expense for defending the lawsuit, all of which can be a huge financial burden on the small business.

Q: How is the Affordable Care Act (ACA) affecting the franchise industry?

A: The ACA has done one thing for certain for both franchisors and franchisees: it has confused them. The implementation of the ACA has required diligent franchisors and franchisees to undertake serious efforts and incur substantial costs in many situations to ensure compliance. In my opinion, there is no “figuring it out on your own” – we are advising our clients to seek out experts on the various aspects of the ACA and are working directly with clients in those areas where we can provide counsel. The greatest advice we are offering, is, don’t wait. We are encouraging any clients that have not taken steps to comply, to immediately take those steps. Understanding if the franchisor or franchisee is covered is step one, and gaining that understanding may be a very simple inquiry; once that inquiry is answered, creating the action plan is critical. As such, time and money are needed which many franchisors and franchisees do not have or do not want to spend. Taking on this additional expense may be problematic for many franchisors and franchisees – but it is a must.

Q: We recently learned that McDonald’s could be held jointly liable for labor and wage violations by its franchise operators. What’s your take on the situation?

A: The McDonald’s situation is an extremely hot topic among the franchise community. It has the potential to shake up the industry that has operated for many, many years with a particular understanding – that franchisees are independent business people meaning they can make independent business decisions such as hiring and firing employees without the franchisors consent. I think the independence that franchisees have (some more than others) is critical to the growth of franchising as a way of expanding a system. The fear is that if franchisors are required to monitor each franchisee's conduct, in every aspect, on a day to day basis (i.e., hiring and firing of employees) - then franchisors will not expand and franchisees will not invest. I think this is a real concern. There are and always have been trepidations about vicarious liability. However, the “joint employer” approach takes that concept beyond the arms-length obligations that franchisors typically require, and to which franchisees must adhere. I cannot prognosticate what the National Labor Relations Board (NLRB) will do, or how it will affect franchising as we know it, but I can guess that it will require substantial monetary commitment by franchisors and franchisees in the form of re-writing manuals, agreements, insurance policies and increased staff and training. At present, the industry is not likely prepared to endure these requirements. I don’t think it marks the end of franchising as some have argued, but I do think it will require the leaders of the industry to step up and work on effective means to work within the “new” framework to the extent necessary.

What Does CohnReznick Think?
Since its enactment, the ACA has benefited the franchise industry. As operators were looking at ways to cut hours in order to control ACA-related costs, enactment of the bill means the floor just a got a little higher. In 2013 when the bill was being introduced, CohnReznick maintained that many employees would opt out of employer-provided health care, and the bill would also lower the number of employees eligible for coverage. At this time, CohnReznick is working with clients to assist them with compliance of the bill. While this can be a tedious and costly process, it is necessary for the future of the business.


For more information, please contact Kelly O’Callaghan, partner and IT audit practice leader, at or 973-618-6221, or Justin Klein, partner, Marks Klein and founder of Garden State Franchise Association, at or 973-618-6221.

To learn more about CohnReznick’s Hospitality Industry Practice, please visit our webpage.

About Marks & Klein
Marks & Klein is recognized by Chambers USA as one of America’s Leading Law Firms for Business, Franchise. This reflects the law firm’s outstanding work, impressive strategic growth and excellence in client service. With office locations in the heart of New Jersey, on the banks of the Navesink River, Wall Street in New York, downtown Chicago, and Boca Raton, Marks & Klein, LLP is on the cutting edge of the legal world and focuses on providing conscientious, thorough and effective legal counseling for all clients on every matter. Marks & Klein, LLP has the ability to handle cases in all 50 states. Attorneys are admitted to practice in the state courts of New Jersey, New York, Pennsylvania, Illinois and Florida, as well as numerous federal courts throughout the United States, including the United States Supreme Court. For more information, please visit

About Garden State Franchise Association
The Garden State Franchise Association dedicates itself to supporting the individuals and businesses in franchising at the franchisor, franchisee and supplier levels. Members are committed to promoting, enhancing and fostering the success of franchisors and franchisees in New Jersey through communication, political advocacy, networking, support services and educational programs. The Garden State Franchise Association is committed to supporting the growth of franchising through executive development, and encouraging best practices in franchising through regular programs and networking. For more information, please visit

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