This article first appeared in the February 2008 issue of LJN’s Franchising and Business Law Alert and is republished on this website with the permission of ALM Properties, Inc. (www.ljnonline.com)  Its contents are not to be redistributed by viewers or used for commercial purposes.

FEDERALISM AT WORK:
CHANGES TO STATE CIVIL RIGHTS STATUTES CONTINUE TO INCREASE EMPLOYMENT LIABILITY RISKS
By David L. Cahn and David G. Ross

You probably know that workplace discrimination is “against the law.”  However, unless you spend a substantial amount of time addressing employment issues, you may not know enough.  What types of discrimination are prohibited?  Who enforces these laws, and what are the consequences for failure to comply?  Does the size of a business play a factor in determining the level of risk?  And do rights and obligations vary from state to state and locality to locality?  A review of the State of Maryland ’s recent changes to its Fair Employment Act provides an excellent illustration of these issues – and should give franchisors a greater understanding of how the system works.

I.  A Primer on Civil Rights Laws

The issue of employment discrimination is largely governed by federal, state, and (sometimes) local statutes.  The most famous of these statutes are Title VII of the Civil Rights Act of 1964 (“Title VII”), 42 U.S.C. §2000e et seq., which prohibits discrimination (including harassment) based on characteristics such as race, sex, national origin, and ethnicity; the Americans With Disabilities Act (“ADA”), 42 U.S.C. § 12101 et seq., which prohibits discrimination based on disability; and the Age Discrimination in Employment Act (“ADEA”), 29 U.S.C. § 621 et seq., which provides similar protections against age-based discrimination.  These statutes are federal (Congress-created) laws that apply throughout the country; their application is limited, however, to those employers that have a certain minimum number of employees:  Title VII and the ADA cover only those employers that have 15 or more employees for a substantial portion of the year, whereas the ADEA requires a minimum of 20 employees.

In addition, most states have enacted their own civil rights laws.  State and local statutes cannot remove or restrict rights granted to employees by federal law, but they can provide greater, additional, or more comprehensive protections.  The complementary role that the states and localities play becomes apparent when one compares the federal statutes with the District of Columbia Human Rights Act (“DCHRA”), DC ST § 2-1401.01 et seq., Washington, D.C.’s primary civil rights statute.  In addition to forbidding the types of workplace discrimination already prohibited by federal laws, the DCHRA also prohibits discrimination based on other factors such as sexual orientation.  Moreover, the D.C. law applies to employers of all sizes – even those that employ only one person.  Likewise, while the federal statutes put “caps” or “ceilings” on the amount of damages that can be awarded to an employee, the DCHRA contains no such limitations.

Another difference between the federal and state/local laws involves procedure.  Before suing under one of the federal civil rights statutes, an employee must exhaust his or her administrative remedies by filing with Equal Employment Opportunity Commission (“EEOC”).  The states, on the other hand, vary with regard to procedure.

For example, some states have created EEOC-like state/local agencies.  Of those states, some require the employee to exhaust administrative remedies, whereas others allow employees to choose between proceeding through an agency and going directly to court.  Moreover, some states empower their administrative agencies to make binding decisions and grant relief (such as orders to reinstate fired employees and issuance of money awards), powers that are greater than those possessed by the EEOC at the federal level.

II.  The Maryland Anomaly

The Maryland Fair Employment Practices Act (“FEP”), Md. Ann. Code Art. 49B, § 14 et seq., is different than most employment discrimination statutes.  That’s because, in large part, Maryland is different than most states.  Under Maryland law, certain counties enjoy a limited degree of “self-rule.”  Although those counties are bound by statewide laws, they are also empowered to enact and enforce some of their own, additional laws as long as they do not contradict state law.  As a result, employees located in some of the “self-rule” counties enjoy greater protection under the FEP than do those located in other counties.

Maryland ’s FEP, which applies only to those employers with 15 or more employees, forbids the types of workplace discrimination already prohibited by Title VII, the ADEA, and the ADA – plus “sexual orientation”-based discrimination.  Under the FEP, a covered Maryland employee who has suffered – or believes to have suffered – from unlawful workplace harassment may initiate an administrative action and appear for a hearing before the Maryland Human Rights Commission (the “MHRC”).  Until recently, however, the MHRC was empowered to do little more than order reinstatement of the employee and award limited lost “back pay” and attorneys’ fees.  Further, for employees located outside of the “self-rule” counties, the possibility of this administrative relief was the only weapon available; that is, those employees could not “sue” in court for violation of the Maryland FEP.

In contrast, some of the “self-rule” counties have provided additional protections for employees.  First, employees located within those counties may use the “statewide” remedies, proceed through county agencies, or even file lawsuits under county laws.  Second, employees lucky enough to be in those counties are permitted to seek, in addition to reinstatement and back pay, “front pay,” compensatory (e.g., “emotional distress”) damages, and punitive damages – all of which have the potential to drastically increase the amount of money they receive.  In those counties, employees even have an advantage over those who sue under federal laws:  like the DCHRA, those county laws do not put “caps” on the amount of damages that one may obtain in court.  Finally, some counties apply their statutes to each and every employer, regardless of the number of employees, whereas one county covers all employers that have 5 or more employees.

In 2007, the State of Maryland acted to reduce – but not completely eliminate – the disparities among the counties.  Pursuant to recent amendments to the FEP, much greater relief has become available to employees on a statewide basis.  As of last October, employees throughout Maryland may obtain compensatory – and sometimes punitive – damages in addition to other relief.  In addition, an employee proceeding under the FEP may choose between (i) seeking such relief in an administrative hearing before the MHRC, (ii) having the MHRC file suit in court on his or her behalf, or (iii) directly filing the lawsuit.  However, the FEP, like its federal counterparts, puts caps on damages, and its 15-employee threshold remains unchanged. 

III.  Implications For Franchising

Even if you do business in a different state, the developments in Maryland offer a useful glimpse of the interaction various discrimination laws – and the issues that most employers need to consider.  While one motivation to use franchising as a growth strategy is to avoid entanglement with employment laws, franchisors still need to be aware of these issues for the following reasons:

Competitive pressures to provide HR Guidance:  In the competitive marketplace for selling franchises, many franchisors promote a “turn-key system” of operations.  One arguably important aspect of operating a franchise is familiarity with human resources (“HR”) “best practices,” including strategies to avoid discrimination liability.  Indeed, a franchisee’s failure to comply with anti-discrimination laws could result in negative publicity for the franchise brand.  Accordingly, by providing its franchisees with some degree of guidance on this topic, the franchisor arguably is protecting itself.

If HR guidance is part of your operations manual or training, you should note in the materials that state and local laws applicable to the franchisee’s business may expand their potential liability beyond that provided under federal law.  Conversely, if you have avoided providing anti-discrimination training on the belief that the franchised businesses have too few employees to be subject to statutory discrimination claims, you may want to determine whether some of your franchises are subject to state or local antidiscrimination laws with lower (or no) employee minimums.

Vicarious Liability:  Despite best efforts to avoid vicarious liability for claims made by their franchisees’ employees, franchisors have been held liable for their franchisees’ actions in certain limited situations.  Given that reality, it is important to be aware of your company’s potential exposure for claims under theories other than federal civil rights statutes.

Direct Liability for Employment Laws:   On rare occasions, the franchisor exercises such a significant degree of control over its franchisees’ employees that the franchisor is considered a “co-employer” or “joint employer” of those workers – and thereby held directly liable for employment discrimination.  As demonstrated in the 1998 case of Lockard v. Pizza Hut Inc., courts are reluctant to impose such liability unless the franchisor is making direct decisions regarding scheduling and other day-to-day employment issues.  Since the potential danger does exist, however, you must be cognizant of it.

So be aware of these issues.  A franchisor must be aware of the anti-discrimination laws before it can take steps to avoid costly violations.

David L. Cahn, Esq., who is the principal of Franchise & Business Law Group in Baltimore, Maryland, can be reached at dcahn@franbuslaw.com.  David G. Ross, Esq., who is principal of Ross Law Firm, LLC and of counsel to Franchise & Business Law Group, can be reached at dross@rlflegal.com.