There is growing concern over whether courts will deem franchisees "employees" or "joint employers," as opposed to contractors or wholly separate enterprises, as further decisions are handed down in the wake of the highly publicized Awuah case and courts grapple with today's complex franchisor-franchisee relationships.
BACKGROUND: AWUAH V. COVERALL NORTH AMERICA, INC.
In 2010, the United States District Court for the District of
Massachusetts held in Awuah v. Coverall North America,
Inc. that a group of janitorial franchisees were misclassified
as independent contractors. Awuah v. Coverall N. Am.,
Inc., 707 F. Supp. 2d 80, 84-85 (D. Mass. March 23,
2010).
The case began when a group of franchisees sued Coverall North
America, Inc., a commercial cleaning company. The franchisees made
three major arguments. First, they argued that Coverall
misrepresented the amount of money they could make each month by
purchasing a franchise. Second, they alleged that Coverall
systematically breached franchise agreements by not providing or
offering adequate work to produce the promised level of monthly
income. Third, they claimed that they were improperly classified as
independent contractors and thereby denied various employment
benefits, including minimum wages, overtime pay, and eligibility
for unemployment and workers' compensation. The plaintiffs
sought compensation for the alleged violations, including statutory
trebling of wage-related damages, and attorneys' fees and
costs. The franchisees filed a motion for partial summary judgment
on the independent contractor issue in December 2009.
In a March 23, 2010 decision granting the motion for partial
summary judgment, the United States District Court for the District
of Massachusetts ruled that the franchisees had been misclassified
as independent contractors and instead were "employees"
under Massachusetts law. Awuah, 707 F. Supp.2d at 80 (D.
Mass. 2010). The court held that Coverall failed to carry its
burden to satisfy Massachusetts' test for determining whether
an individual is an independent contractor. The Massachusetts test
requires that three elements must be satisfied in order for an
independent contractor relationship to exist: (i) the worker is
free from control and direction in connection with the performance
of a service; (ii) the service performed is outside the usual
course of business of the employer; and (iii) the worker is
customarily engaged in an independently established trade,
occupation, profession, or business of the same nature as that
involved in the service performed.
The court found that the second prong (service outside the
employer's usual course of business) was not met. The court
found that Coverall was engaged in the same business as its
franchisees for several reasons, including the fact that Coverall
sells cleaning services, which are the same as the services the
plaintiffs provide. Because the Coverall franchisees did not
perform services outside the course of Coverall's business, the
court held that they were not independent contractors but were
instead Coverall employees.
After the March 23, 2010 ruling, both parties filed cross-motions
for summary judgment regarding the damages claim of one of the
misclassified franchisees. The court subsequently held that
franchise fees that the franchisee paid under its contract with the
franchisor were freely undertaken and would not be considered
damages under the Massachusetts misclassification statute.
Awuah v. Coverall N. Am., Inc., 2010 WL 3766486, at *2 (D.
Mass. Sept. 28, 2010). The court also stated that Coverall was
required to reimburse the franchisee for any insurance premiums
that Coverall was statutorily mandated to provide. In addition, the
court required Coverall to pay interest on wages that were paid
outside of the statutorily required time frame. Id. at *3.
Finally, the court found that Massachusetts state law provided no
clear guidance concerning damages recoverable by a misclassified
franchisee and certified questions concerning damages and
"related interpretations of the Massachusetts General
Laws" to the Massachusetts Supreme Judicial Court for
resolution. Order of Certification at 10, Awuah v. Coverall N.
Am., Inc., 2010 WL 3766486 (2010) (No. 07-10287-WGY).
DEVELOPMENTS SINCE THE 2010 AWUAH DECISIONS
2011 and 2012 Awuah Decisions
On August 31, 2011, the Massachusetts Supreme Judicial Court
addressed the state law claims that the Massachusetts Federal
District Court had certified almost a year earlier. Namely, the
court answered the question of (i) whether a Massachusetts employer
could use a system of customer accounts receivable financing to pay
its employee at the time the customer paid the employer for the
employee's work; (ii) whether, under the Massachusetts Wage Act
(the "Wage Act"), an employer and employee could agree
that the employee would pay the cost of workers' compensation
and other work-related insurance coverage; and (iii) whether, in
the case before it, Coverall could deduct "franchise
fees" from such wages. Awuah v. Coverall N. Am.,
Inc., 952 N.E.2d 890 (Mass. Aug. 31, 2011).
The Supreme Judicial Court ruled that damages the franchisee could
recover from Coverall for Coverall's failure to treat the
franchisee as an employee include franchise fees and insurance
premiums, along with attorneys' fees and possibly treble
damages. Id. at 895. Additionally, the court held that
Coverall could not pass on workers' compensation and insurance
costs to the franchisee because these costs protected Coverall.
Finally, the court held that chargebacks to the franchisee for
unpaid bills also violated the state's Wage Act. The court
interpreted the Wage Act to prohibit Coverall from deducting or
withholding payment of any earned wages. The court held that
chargebacks to the franchisee violated this provision because they
allowed Coverall to recapture wages already earned and paid.
Id. at 897.
The court declined to answer or review the question of whether the
plaintiffs in the case were employees, primarily because Coverall
conceded for the purpose of the proceeding that the plaintiffs were
employees. Thus, the court focused only on the question of damages.
Specifically, the decision stated that "answers to the
certified questions [were] premised on the plaintiffs'
agreed-on employee status [and that] the answers ha[d] no
application to properly classified independent contractors
operating under franchise agreements." Awuah, 952
N.E.2d at 893 n.3.
Most recently, on March 15, 2012, the Massachusetts Federal
District Court supplemented the Supreme Judicial Court's ruling
with an order stating that successful franchisees in the case would
be entitled to recover from Coverall treble damages dating back to
2006. Awuah v. Coverall N. Am., Inc., 2012 WL 910260, at
*1 (D. Mass. Mar. 15, 2012). (Although some plaintiffs' claims
have been resolved, other plaintiffs are proceeding as a class.
Some class certification issues related to the scope of the class
are currently before the First Circuit.)
Awuah's Impact
Similar Cases Have Been Filed Against Franchisors in the Wake of Awuah. The initial holding in Awuah that Coverall's franchisees were misclassified as independent contractors still stands. Other complaints have been filed, and several courts have issued recent decisions relating to a franchisor's potential liability as an "employer" in connection with franchise-related operations. These include:
Jan-Pro Franchising Int'l, Inc. v. Depianti, 712 S.E.2d 648 (Ga. Ct. App. June 23, 2011)
Jan-Pro Franchising International, Inc. ("JPI")
brought a declaratory judgment action in Georgia against Giovanni
Depianti and Hyun Ki Kim, seeking a judgment that Depianti and Kim
were not its employees under the Massachusetts Independent
Contractor Statute ("MICS"). Id. at 648.
After the parties filed cross-motions for summary judgment, the
trial court granted summary judgment to Depianti on the ground that
he was JPI's employee under the MICS. (The court concluded that
issues of fact precluded summary judgment as to Kim.) JPI
subsequently appealed.
The Georgia Court of Appeals reversed the decision. The appellate
court applied the same three-prong test used in Awuah and
concluded that Depianti was not an employee of JPI under the
MICS.
Under the first prong of the test (whether the franchisee is free
from the control and direction of the franchisor), the court found
that the undisputed facts showed that Depianti was not under
JPI's control because JPI had only a franchise agreement with
the regional franchisee. Id. at 651 ("While Depianti,
as a franchisee of BME, implements a business model established by
JPI, Depianti's performance of cleaning services is not
controlled by JPI, which is not a party to the agreement between
BME and Depianti.").
The court also found that JPI met the second prong (the services of
the franchisee must be performed outside the usual course of the
employer's business). Specifically, the court found that the
service Depianti provided—cleaning—was not in
the same scope of business JPI conducted, which focused on
establishing, trademarking, and licensing cleaning systems to
regional franchisees. Id. at 651.
The third prong of the Massachusetts test (showing that the worker
was customarily engaged in an independently established occupation
or business) was met "for essentially the same reasons that
JPI ha[d] demonstrated factors one and two." Id. at
652. For these reasons, no employment relationship was found to
exist between JPI and Depianti, and the order granting summary
judgment to Depianti was reversed.
Hayes v. Enmon Enterprises, LLC, et al. d/b/a Jani-King Franchising, Inc., No. 3:10-CV-00382-CWR-LRA, 2011 WL 2491375 (S.D. Miss. June 22, 2011)
The court in this case faced a question concerning whether a
franchisor had an employment relationship with its franchisee. The
court denied the franchisor's motion for summary judgment and
found the question would have to be resolved by a jury.
The court evaluated 10 factors identified by the Mississippi
Supreme Court for distinguishing between an employee and
independent contractor for purposes of holding an employer liable
for negligent acts. The federal court reviewed the franchise
agreement between Jani-King Franchising, Inc. and Enmon
Enterprises, LLC., the parties with whom the plaintiff allegedly
shared an employer-employee relationship. The court noted that the
agreement contained a variety of conflicting factors. On the one
hand, it appeared as though Jani-King and Enmon intended to create
an independent contractor relationship with one another.
Id. at *3. Their franchise agreement, for example,
acknowledged that Enmon was an independent contractor, and not an
agent, servant, or employee of Jani-King.
On the other hand, the court found that "all relevant
evidence" would be considered to determine whether the intent,
made explicit in the agreement, was actually successful. The court
noted that various provisions in the agreement resembled
characteristics of an employer-employee relationship, including a
limitation placed on Enmon that it would not cancel or terminate
the agreement and a right granting Jani-King the option to
terminate immediately. Id. at *4. Other provisions
suggesting an employer-employee relationship included provisions
concerning Jani-King's control of the work premises and the
kind and character of work to be performed. Id. at *6.
These provisions, when compared with the provision specifying that
Enmon was an independent contractor of Jani-King, led the court to
deny summary judgment for Jani-King and refer the case to a
jury.
Bricker v. R&A Pizza, Inc., 804 F. Supp.2d 615 (S.D. Ohio April 8, 2011)
A federal court in Ohio also addressed the question of whether a
franchisor was an employer of a franchisee in Bricker v.
R&A Pizza. The court in Bricker granted the
franchisor's motion to dismiss a case filed by female employees
against Domino's and its franchisee alleging employment
discrimination under Title VII and Ohio law. The court applied a
test adopted by the Sixth Circuit for determining whether a
franchisor would be considered the employer of a franchisee's
employees. The test considers (i) the interrelation of operations
of the businesses, such as common offices, recordkeeping, and bank
accounts; (ii) common management, directors, and boards; (iii)
centralized control of labor relations and personnel; and (iv)
common ownership and financial control. Swallows v. Barnes
& Noble Book Stores, Inc., 128 F.3d 990, 993 (6th Cir.
1997).
The determining factor under the test in deciding whether an agency
relationship exists between a franchisor and a franchisee is the
degree of control the franchisor has over the operations of the
franchisee's business. Bricker, 804 F. Supp. at
623.
The court found no indication that the franchisor (Domino's)
and franchisee (R&A Pizza) operated as a single employer
because there were no factual allegations in the complaint of such
a relationship. Accordingly, the court found that no special
relationship could be inferred that would give rise to a duty of
care owed by Domino's to the plaintiff and dismissed the case
against Domino's. Id. The case now proceeds in the
Southern District of Ohio against R&A Pizza alone.
Juarez v. Jani-King of California, Inc., 2012 WL 177564 (N.D. Cal. Jan. 23, 2012)
In Juarez, a case brought by franchisees against
Jani-King in California, a federal court granted summary judgment
in favor of Jani-King on the plaintiffs' state labor code
claims. Like in Enmon, the court in this case faced a
question concerning whether a franchisor had an employment
relationship with its franchisee.
The plaintiffs in the case alleged 14 causes of action against
Jani-King, including causes of action for statutory fraud, claims
under the California Labor Code, breach of contract claims, and
breach of good faith and fair dealing claims. Jani-King asserted
counterclaims for breach of contract, tortious interference with
contract, and tortious interference with prospective economic
relations. Id. at *2.
The legal theory underlying plaintiffs' claims under the
California Labor Code was that Jani-King's common policies and
practices so tightly controlled the plaintiffs' actions as to
create an employer-employee relationship between Jani-King and the
plaintiffs. Id. at *4. Jani-King argued that the
undisputed facts showed that the plaintiffs were independent
contractors. Id.
The court evaluated the claims under California law. California law
provides that the principal test of an employment relationship is
whether the person to whom service is rendered has the right to
control the manner and means of accomplishing the result desired.
Id. California law also provides that other factors
considered to determine if an employer-employee relationship exists
include, among others: whether the principal has the power to
discharge the individual at will; whether the principal or the
worker supplies the instrumentalities, tools, and the place of work
for the person doing the work; and the length of time for which the
services are to be performed. Id.
The court granted summary judgment in favor of Jani-King on the
plaintiffs' California Labor Code claims because it found that
Jani-King did not exercise "sufficient control" over the
plaintiffs to render them employees. Id. For example, the
plaintiffs had the discretion to hire, fire, supervise, and
determine the rate and manner of pay for their own employees.
Id. The court noted that although Jani-King imposed a
number of controls on the plaintiffs (such as retaining sole
ownership of contracts with cleaning clients, performing billing
and accounting for the franchisees, and retaining the power to
terminate a franchisee's right to service a particular client),
these controls "were no more than necessary to protect
Jani-King's trademark, trade name, and good will and
accordingly, did not create an employer-employee relationship
between Jani-King and Plaintiffs." Id. at *5.
State Action to Clarify Whether Franchisees are Employees
of Franchisors Under State Provisions Has Heightened.
Additionally, leaders and policy makers in a number of states have
taken action regarding this issue.
Virginia Attorney General Opinion: One
example of this is an Opinion the Virginia Attorney General issued
in early 2011. The Opinion clarifies that Virginia law does not
find an employment relationship between a franchisor and
franchisee. The test that the Attorney General relied upon in
making this conclusion is articulated in the proposed Virginia
Worker Misclassification Act (the "Act"), S.B. 34, 2010
Sess. (Va. 2010) (proposed Jan. 13, 2010 and continued in 2011, but
not yet passed). Under a three-prong test proposed in the Act, an
employment relationship does not exist when (i) an individual is
free from the direction and control of the employer under contract
and in fact; (ii) the service provided by the individual is outside
the usual course of business of the employer; and (iii) the
individual is customarily engaged in an independently established
trade, occupation, profession, or business both in contract and in
fact.
After the Act was proposed, an individual sought an official
request for an advisory opinion from the Virginia Attorney General
that would answer the question of whether the Act would consider
franchisees "employees" rather than independent
contractors.
In an Opinion released in early 2011, the Virginia Attorney General
stated that, in general, the test described under the Act would not
find an employment relationship between a franchisor and
franchisee. Distinguishing franchisees from traditional employees,
the Opinion states that the franchisee is performing services not
for the employer, but for the "profit and account of the
franchisee." Va. Op. Att'y Gen. No. 10-111 (January 25,
2011).
Further, the Opinion states that a franchisee is unlike a
traditional employee because it is a corporation, rather than an
individual, and is not being compensated by the franchisor.
Id. Consequently, the Virginia Attorney General concluded
that the "application of [the] test to typical franchise
agreements would result in the exclusion of franchisees and
franchisors from the scope of [the] statute."
Id.
Pending Legislation in the Massachusetts House of
Representatives: There is pending legislation in the
Massachusetts House of Representatives that would clarify that
franchisees are not employees of a franchisor. The legislation has
been in committee since June 2011. Massachusetts House Bill 3513
would clarify that "an individual who owns a franchise, or is
a party to a franchise agreement under which he or she is
authorized to sell products and/or services (a) in accordance with
prescribed methods and procedures; and (b) under service marks,
trademarks, trade names and other intellectual property licensed
under such agreement, shall not be considered an employee of the
franchisor." H.B. 3513, 186th Leg., 2010 Sess. (Mass.
2011).
CONCLUSION
The recent cases filed and decided in the wake of Awuah
highlight the need for franchisors to continue to engage in
business practices that confirm clearly separate enterprises,
especially as it relates to employment decisions. In doing so,
franchisors should carefully review their franchise disclosure
documents and franchise agreements, and ensure franchisees have
sufficient control over the daily operations of their businesses.
Such contract provisions help support independence, which is a
hallmark of independent-contractor status. That, in turn, can help
mitigate the risk of an "employee" determination.
Franchisors also should review other materials and resources they
provide to franchisees, including training and HR materials, which
can be used to demonstrate control over the employment operations
of the franchisee. A good practice remains to label these documents
with appropriate disclaimers that the franchisee maintains total
control over the employment operations of the business.
On the other hand, especially in this growing global marketplace
where information (and, indeed, allegations) flows so quickly from
one part of the world to the next, there remains an increasing
tension between the franchisor's desire to "control"
and promote quality operations, goodwill, and the brand, and the
desired separation between franchisors and franchisees. Media,
weblogs, or even lawsuits lambasting the brand—even if
the result of a franchisee's misstep—can be just as
damaging to the franchisor as mistakes made by the franchisor
itself. We see this tension continuing to increase and the
franchisor's vigilance in avoiding "joint employer"
arguments as important as ever.
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