While the changes coming to Our Nation's Capital in 2017 likely mean the end of the fight over reclassifying franchisees as employees at the federal government level, a recent New York state case suggests that the battle will remain alive and well at the state level. The case, In re Baez, was decided by the New York Supreme Court, Appellate Division. The question presented by the case was whether the franchisor, Jani-Pro Cleaning Systems ("Jani-Pro") was the employer of two independent franchisees for purposes of unemployment insurance contributions.

Baez was a franchisee of Jani-Pro who ceased his operations in 2009 and subsequently sought unemployment insurance benefits. At about the same time, the New York Department of Labor opened an unemployment tax audit of Jani-Pro. As a consequence of the combination of Baez's application for unemployment benefits and the audit, the Department determined that Baez and all persons similarly situated—i.e., other New York franchisees of Jani-Pro—were employees of Jani-Pro and that Jani-Pro owed unemployment insurance contributions on their behalf.

Jani-Pro appealed and, after a hearing, an Administrative Law Judge reversed the Department's determination. This decision, in turn, was reversed by an appeal board ("Board"), which reinstated the determination of the Department. Jani-Pro then appealed to the Appellate Division of the Supreme Court.

An extremely important consideration was that the Appellate Division showed great deference to the decision of the Board. The Appellate Division said that whether an employment relationship exists is a factual question for the Board to determine and that no single factor was determinative of that question. The Appellate Division noted that there was evidence on both sides of the franchisee versus employee question. Nonetheless, it concluded that "substantial evidence" supported the Board's determination.

The decision is far from detailed, unfortunately. Reading between the lines, however, it seems the Appellate Division was particularly troubled by the facts that Jani-Pro handled all of the franchisees' invoicing and collections, and that Jani-Pro accepted all payments from the franchisees' customers. The court also noted that Jani-Pro paid for the training of new franchisees, which is common in employment relationships. The court additionally explained that Jani-Pro maintained the relationship with a franchisee's customers, retaining the right to discontinue the franchisee's services "at any time".

Nonetheless, the guidance offered by the Baez decision is limited. However limited it is, franchisors—and those franchisees who do not want to re-classified as employees—would be advised to take heed of the decision. Where exactly the line falls at which franchisors exert too much control over the operations of their franchisees can be a difficult call to make. It is always a balancing test. The Baez case shows, however, that the question will not go away solely because of the coming changes in Washington.

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