Franchise Disclosure Document – Item by Item Analysis (Part one of a series)

Business Law Notes

Summer 2009 Edition


Franchise Disclosure Document – Item by Item Analysis
(Part one of a series)

By M. Blen Gee, Jr.

Far and away the most important legal protection for franchisees in this country is the broad pre-contract disclosure requirements of the Federal Trade Commission (FTC). The FTC Franchise Rule requires certain specific disclosures by a franchisor in a Franchise Disclosure Document (FDD), As franchisors and their attorneys have become increasingly sophisticated, it is more important than ever to review the FDD with a critical eye. Here are some important things to look for:

ITEM 1 – The Franchisor. its Predecessors and Affiliates. Is this a relatively new franchisor? If so. caution and careful scrutiny of the franchise is recommended. Many start-up franchises have a great concept, but execution of the concept on a systemwide basis sometimes is not adequate. On the positive side. a smaller and newer franchise system may be more willing to accept modifications to its standard franchise agreement; this provides a great opportunity to negotiate out of some of the more onerous provisions found in the typical franchise agreement.

Look at affiliated companies and determine how they are related to the franchisor. Frequently an affiliate company will be the owner of the ‘corporate” outlets. Determine how many “corporate” outlets there are. If there Is only one corporate store. this means less operational experience. If there are no corporate outlets, you can expect operational aSSistance from the franchisor to be minimal in the future. It may also mean that the franchisor is more interested in selling franchises than continuing to develop and strengthen the franchise concept.

Are any of the affiliated companies in a similar business? If so. you may find that the affiliated company will open a competing business in your territory.

ITEM 2 – Business Experience. Prior experience of key management personnel will be listed here. For small or startup franchise systems, prior business experience of the management can be an important indicator of the quality of the system as a whole. If senior staff is heavy on the side of former sales and marketing people, the franchisor may be more oriented toward selling franchises than long-term business performance. On the other hand, if senior management personnel have several years of high-level operational experience with a well known and well run major franchise, this bodes well for the operational performance of the small or startup franchise system.

If you are investigating a relatively new franchise system without a track history and only a few current and former franchisees to contact, the prior experience of management personnel will be a critical factor.

>> Read part two of our Franchise Disclosure Document series



By M. Blen Gee, Jr.

North Carolina is an employment-at-will state, i.e., in the absence of a contract for a specific term, either the employee or the employer may terminate the employee’s employment for any reason – except that the employer may not discharge an employee for a reason that violates public policy. For instance, an employee-at-will cannot be terminated for reasons that would violate anti-discrimination laws (age, sex, race, national origin, religion, disability). Nor may an employee-at-will be terminated in retaliation for the exercise of his or her rights, including that of filing of a workers’ compensation claim. Employers should be aware of the following key issues [though not an ali-inclusive list] when considering the termination of an employee.

1. Termination Letter – For “at will” employees (no written, oral or implied agreement that the employee is employed for a specific period of time), it may be preferable to have no termination letter or a simple letter stating that the employee’s performance has not met the company’s needs. This is especially true If you have not documented the employee’s previous poor performance.

A termination letter may be useful where the employee’s prior poor performance has been properly documented by previous letters to the employee. Such letters should be placed in the employee’s confidential personnel file. Then, in the event of termination, a termination letter can outline the specific performance issues that have not improved and provide a clear justification for termination.

2. Severance Packages – Severance packages are complex legal documents. Employers who decide to offer severance packages to employees in exchange for a legal release of age discrimination claims must ensure that their severance agreements comply with the Older Worker’s Benefit Protection Act (OWBPA). To be valid and enforceable, the release must be knowing and voluntary, in writing, specifically refer to rights or claims under the ADEA by name, and be drafted in plain language that the employee will understand. The employee must also be advised in writing to consult with an attorney before signIng the agreement and be given additional consideration in exchange for the release.

If the severance package containing the release of age claims is given to a single employee, the employee must be given 21 days to consider the agreement and seven days to revoke his/her acceptance after signing. If the severance package and release is offered to a group or class of employees, then those employees must be given 45 days to consider the agreement and seven days to revoke acceptance.

Moreover, releases given to a group of employees must also provide the employees with enough information to allow an informed choice as to whether to sign the release. This includes the class, unit or group of individuals covered by the program: any related eligibility factors: the job titles and ages of all individuals North Carolina is an eligible or selected for the Employment-at-will state. program and the ages of all individuals in the same job classification or organizational unit who were not eligible or selected.

3. Exit Interview – Keep it short, unemotional and professional. Remember, an employee who is angered by a termination letter or the exit Interview is more likely to look for a way to seek revenge, either through discrimination claims or other forms of attack against the former employer. The exit interview should be in private, in a quiet location away from other employees. There should be at least two people present in addition to the employee.

4. The Exit – The employee should be directed not to take with him any confidential company information or any property belonging to the company. The employee should surrender any keys, company credit card , or other company property and computer passwords in his possession at the time of the exit interview.

Accompany the employee to his or her work station to retrieve personal items. Sometimes people who are very emotional will want to leave immediately. In that case, personal items should be boxed up for the employee, with an itemized list prepared. The employee can return at an agreed-upon time to get personal items or the items can be mailed to the employee certified mail, return receipt requested.

5. COBRA and Other Benefits – Be sure to notify the employee in writing of his or her COBRA benefits and maintain a copy of this notice in your permanent file. Also notify the employee of any other post-termination benefit.

All wages due on or before the next regular payday either through the regular pay channels or by mail if requested by the employee. Wages based on bonuses, commissions and similar forms of calculation must be paid on the first regular payday after the amount becomes calculable.

Accrued vacation must be paid unless you have provided in his belief that he would have continued employment; or. the employee with written notice that vacation will be forfeited upon termination. Except under very limited circumstances, wages cannot be withheld and the employer is subject to double damages and attorney’s fees for wrongfully withholding wages.

6. Written Procedures – If there is a written employment agreement, or an employee handbook, the written procedures for termination should be strictly followed.

7. Slander or Libel Exposure – Do not discuss the reasons for terminating the employee with anyone outside of management. Do not discuss it with rank and file employees, clients or any third party. If anyone calls to your office checking on the former employee’s references, the person responding should simply say that you cannot comment. All written statements concerning the termination. including the termination letter, should be maintained in a confidential file that is not subject to access by non-management personnel.

8. Issues Requiring Special Care – If any of the following issues or conditions are present, you should exercise special care in the termination, including contacting legal counsel:

  • Employee is 40 years old or older;
  • Is there any evidence suggesting that the decision to terminate this employee is related In any way to his or her known handicaps or disabilities? (See the ADA, 42 U.S.C. § 12111 , et seq. and the Handicapped Persons Protection Act, N.C. Gen. Stat. § 16SA-1, et seq.);
  • Racial, ethnic or national origin issues;
  • Family Medical Leave Act issues;
  • HIV;
  • Prior allegations of sexual harassment:
  • Recent jury duty;
  • Workers camp claim, court testimony, employee Initiated inquiry; investigation and inspection or other government action;
  • Alleged wage and hour violation;
  • Military service;
  • The employee is a recent hire, has recently relocated at the request of th e employer or as a result of employment, or the employee has taken any other aclion such as buying a new home in his belief that he would have continued employment; or.
  • Any other allegations by the employee of employer misconduct.

9. Employee’s Personnel File – The employee’s personnel file should be examined. Frequently, employees will have received favorable written evaluations even though the employee’s performance was less than adequate. If the employee is terminated based on poor performance, these positive evaluations could raise an implication that delerminatlon is for some other reason.

10. Is there a written employment agreement? Are there documents which could be argued to be agreements (e.g., letters regarding initial employment) between the company and the employee? If so, those agreements should be reviewed. Has anyone at the company made any oral promises or assurances to the employee that would or may be violated by the termination decision?

Of course, independent contractors are not employees. They are contractors who perform services for the business according to the terms of their contract. Before terminating the services of an independent contractor, the contract creating the relationship should be carefully scrutinized.

About our author:


M. Blen Gee, Jr. is an honors graduate of the University of North Carolina School of Law. His areas of concentration include business and corporate law, including sales of businesses; business litigation, including arbitration and mediation; franchise law; automobile dealer law; and insurance company insolvency. Mr. Gee has earned the highest peer-review rating for professional excellence and ethical standards by the national publication Martindale Hubbell.

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