A federal court recently held that under California law, cleaning services franchisor Jan-Pro Franchising International (Jan-Pro) was not the employer of its unit franchisees. The franchisee plaintiffs failed to show that Jan-Pro exercised sufficient control over day-to-day employment activities or reserved the right to exercise such control.

Jan-Pro operates a three-tier franchising structure. Jan-Pro grants the right to use its trademark "Jan-Pro" to a regional master franchisee for a specific geographic area. The master franchisee is responsible to sell Jan-Pro franchises in that area. The master franchisee sells unit franchises, giving franchisees the right to service accounts provided by the master franchisee. Each unit franchise operates pursuant to a franchise agreement. Franchise agreements are between the master franchisee and unit franchisee, but Jan-Pro is not a party.

The unit franchisees sued Jan-Pro seeking minimum wage and overtime premiums, claiming they were improperly classified as independent contractors when they were really Jan-Pro's employees. The court evaluated the claims under California's three alternative definitions of an employer/employee relationship: (i) exercise of control over wages, hours, or working conditions; (ii) to suffer or permit to work; or (iii) to engage, thereby creating a common law employment relationship. A common-law employment relationship requires evidence of the right to control day-to-day activities.

The unit franchisees argued that Jan-Pro met the first and third definitions because Jan-Pro's contracts with its master franchisees gave it the absolute right to control policies and procedures of any master franchisee as well as any unit franchisee. The court disagreed. It found the right to control policies and procedures were set forth only in Jan-Pro's contracts with its master franchisees, not in contracts with unit franchisees. The court determined that unit franchisees' franchise agreements with master franchisees did not set out any rights for Jan-Pro or otherwise indicate that Jan-Pro would be a third-party beneficiary. The court concluded that the unit franchise agreements did not create rights between Jan-Pro and the unit franchisees.

Next, the court rejected the unit franchisees' argument that Jan-Pro had authority to stop them from working under the second definition of an employer/employee relationship. The court stated that Jan-Pro's agreements with regional master franchisees purported to confer that authority, but the unit franchisees' agreements with master franchisees did not extend Jan-Pro's authority to the unit franchisees.

Finally, the court rejected an ostensible agency theory raised by the unit franchisees because they failed to offer evidence that they believed the master franchisees were agents of Jan-Pro.

The court's analysis focused on features that are unique to subfranchise systems, specifically the lack of a direct contractual relationship between the franchisor and unit franchisees. A franchisor considering a subfranchise system should pay particular attention to the contractual rights it can enforce directly against unit franchisees. If a franchisor determines that it wants to have some direct contractual rights then it should be careful not to exert direct or indirect control over a unit franchisee's employment conditions in a way that would make it a joint employer.

Read: Roman v. Jan-Pro Franchising International, Inc., N.D. Cal.