Employee or Franchisee? Or Both? September 2021 News Update

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In the same month that 7-Eleven prevailed in a federal court trial where convenience store franchisees claimed they were not independent contractors but rather employees entitled to the protections of state labor laws, a federal appellate court concluded last month that franchisees can be employees for purposes of some state laws.  As discussed below, the issue in the appellate case involved whether a commercial cleaning franchisor, Jani-King, was permitted under the Connecticut minimum wage and anti-kickback labor laws to deduct fees from the earnings of the franchisees. The court concluded that Connecticut law permits such deductions even if the franchisees are employees under state wage laws. Franchisors should note, however, that Connecticut law is not in harmony with the minimum wage and wage deduction laws in many other states, and unless the franchisor has elevated its level of compliance with federal and state independent contractor laws, it is at risk of an adverse judgment for misclassification liability.  Franchisors would be wise to utilize a process such as IC Diagnostics (TM) to restructure, re-document, and/or re-implement their IC relationships to enhance IC compliance in a customized and sustainable manner consistent with their business model.

We also report on two newsworthy IC misclassification cases in the oil and gas industry. First, an unsuccessful effort by an oil and gas company to piggyback on the arbitration clause of a workforce app used to staff projects. This case is yet an additional reason why any company using an independent contractor, whether on a project basis or otherwise, should condition the worker’s engagement on signing a state-of-the-art independent contractor agreement, which is part of the IC Diagnostics process. Second, a $43,000,000 consent judgment secured by the U.S. Department of Labor in federal court against an oil and gas company that conceded to having misclassified over 700 abstractors, title examiners, and landmen as independent ‎contractors‎ and not employees, in violation of the overtime provisions of the Fair Labor Standards Act.  The energy business has been in the cross-hairs of plaintiffs’ class action lawyers and the U.S. Labor Department for alleged IC misclassification for several years, as we reported in a blog post in May 2018.

In the Courts (5 cases)

COMMERCIAL CLEANING FRANCHISOR DID NOT VIOLATE CONNECTICUT WAGE LAWS.  The U.S. Court of Appeals for the Second Circuit has concluded that Jani-King, a national commercial cleaning franchisor, did not violate Connecticut minimum wage or anti-kickback laws when it collected contractually agreed upon franchise fees from franchisors, regardless of whether they were independent contractors or employees. Jani-King requires its franchisors to pay a fee to acquire a Jani-King franchise. Its customers pay Jani-King for cleaning services provided by the franchisees, and Jani-King deducts certain fees as per the franchise agreement from payments made by customers before it remits the remainder of a customer’s payments to the franchisee. The franchisees sued Jani-King on behalf of themselves and other similarly situated franchisees alleging that Jani-King misclassified its franchisees as independent contractors and not employees. They further claimed that as employees, the collection of franchise fees by Jani-King violated the state minimum wage and anti-kickback (wage deduction) statutes, as well as unjustly enriched Jani-King.

Affirming the district court’s dismissal of the claims, the Second Circuit concluded that “even if further litigation established that the [franchisees] were employees, Jani-King would still prevail…” The court held that the gross customer revenues received by Jani-King were not the baseline “wage” from which the state law prohibits deductions. “Rather, even assuming that the [franchisees] are employees who receive wages subject to the Connecticut Minimum Wage Act, their wages under the franchise agreement are the funds that remain after Jani-King deducts its fees under the franchise agreement. ‘Connecticut law and public policy of freedom of contract’ therefore require enforcement of the parties’ agreement.’”  The court also stated that under current Connecticut law, an individual can be an employee under the ABC test if an application of the ABC test would deem that individual an employee, even if that individual is also a franchisee.  Mujo v. Jani-King Int’l, No. 20-111 (2d Cir. Sept. 9, 2021).

FRANCHISOR WINS INDEPENDENT CONTRACTOR MISCLASSIFICATION LAWSUIT.  7-Eleven has prevailed against convenience store franchisees who claimed they were misclassified as independent contractors and should have received protections under the law as employees. As we reported in our blog post of September 8, 2021, a federal judge in California issued a decision after a lengthy non-jury trial, concluding that four 7-Eleven franchisees had been properly classified as independent contractors and were not employees under applicable California law. The decision is not a validation that all franchisees are independent contractors. To the contrary, the judge pointed out how the facts in this case differ considerably from those involving commercial cleaning franchisees. Further, the decision does not involve the infamous California “ABC” test, but rather applies the less stringent Borello test for determining independent contractor status.

The court first analyzed the primary Borello factor – direction and control – and concluded that the evidence “compels the conclusion that Plaintiffs were independent contractors.”  The court noted that plaintiffs exercised their own judgment in determining, among other things, what products they would carry, how to price the products, how to organize the store, what promotions to take part in, whom to hire or fire, when to schedule employees, how often and when the plaintiffs themselves would be present at their stores, and what “draws” to take from the stores and when. The court then examined eight “secondary factors” and concluded that only one of the secondary factors favored employee status and one was neutral, while the remainder all favored independent contractor status.

Of particular interest is the court’s analysis of the factor regarding the length of time for which the services have been provided. While the court noted that “[t]his factor generally would weigh in Plaintiffs’ favor,” it continued: “But it would not make economic sense for a franchisee to invest in a franchise with a term too short for the franchisee to recoup his or her investment.” As a result, the court found this factor to be neutral. The decision shows that longstanding and well-established franchisors like 7-Eleven ‎can prevail in these types of cases when the legal standard is a multi-factor test focusing on ‎whether the franchisor has properly avoided directing and controlling the manner and means by ‎which the franchisee provides services and the franchisor has taken meaningful steps to elevate its IC compliance. ‎ Haitayan v. 7-Eleven, Inc., Nos. CV 17-7454 DSF (ASx) and CV 18-5465 DSF (ASx) (C.D. ‎Calif. Sept. 8, 2021)‎.

OIL & GAS COMPANY NOT THIRD PARTY BENEFICIARY OF ANOTHER COMPANY’S ARBITRATION CLAUSE IN INDEPENDENT CONTRACTOR CLASS ACTION.  A mud engineer withstood a motion to compel arbitration by a drilling fluids company that engaged the engineer through “RigUp,” an online workplace bidding platform that connects individuals who have signed up on its website or app with oil and gas industry companies seeking specialized services. During the registration process, the plaintiff executed an independent contractor agreement with RigUp that contained arbitration provisions. Through the RigUp app, the plaintiff was engaged by a third party company, Nova Mud. The mud engineer, who claims he and others similarly situated to him were denied overtime pay allegedly due to him under New Mexico and federal law, brought a proposed class action lawsuit in federal court against RigUp and Nova Mud. In making its motion to compel arbitration, Nova Mud argued that it was a third party beneficiary of the arbitration provisions in the RigUp agreement with the plaintiff and was therefore entitled to enforce those provisions against the plaintiff. In rejecting Nova Mud’s argument, the federal court judge concluded that “there is no indication that Plaintiff and RigUp intended to give third parties the benefit of the arbitration agreement.”  Oldham v. Nova Mud, Inc., No. 2:20-cv-1166 (D.N.M. Sept. 7, 2021).

ENERGY SERVICES COMPANY CONSENTS TO $43 MILLION JUDGMENT FOR MISCLASSIFYING WORKERS AS IC’S.  An oil and energy services company, Holland Services, which supplies abstract and title examinations for the oil and gas industry, has consented to the entry of a consent judgment against it for $43.2 million in a Pennsylvania federal court.  Holland conceded in court papers that it failed to pay overtime to over 700 abstractors, title examiners, and landmen in violation of the federal Fair Labor Standards Act. The judgment consists of $25.8 million in overtime payments and $17.4 million in liquidated damages. However, the workers may not receive a great deal of the funds allocated to each of them from Holland Services because the company is currently the subject of a bankruptcy proceeding. Under the terms of the consent order, though, the court proceeding will continue against Holland’s chief operating officer, Bryan Gaudin. According to a news release, the Labor Department’s Regional Solicitor, Oscar L. Hampton III, stated: “We hope that other employers in this industry use the outcome of this investigation and court ‎action as an opportunity to review their own pay practices to ensure they comply with the law. ‎Failure to do so, as we saw in this case, comes at a significant cost.”

TIME-SHARE VACATION SALES BROKERS GAIN CLASS CERTIFICATION IN INDEPENDENT CONTRACTOR MISCLASSIFICATION LAWSUIT.  A Colorado federal court has conditionally certified a class / collective of sales brokers alleging overtime violations under the FLSA because of their alleged misclassification as independent contractors by Breckenridge Grand Vacations, LLC, which operates four timeshare properties. The plaintiff provided sales broker services assisting clients purchasing ownership interests in the company’s properties. In granting conditional certification, the court concluded that the sales broker met his initial burden of demonstrating that class treatment is appropriate because he asserted and provided supporting documentation in support of “substantial allegations that the putative class members were together the victims of a single decision, policy, or plan.”  McMahon v. Breckenridge Grand Vacations LLC, No. 20-cv-00754 (D. Colo. Sept. 14, 2021). https://www.law360.com/articles/1421765/colo-timeshare-brokers-win-class-cert-in-overtime-suit; https://www.law360.com/articles/1421765/attachments/0

Regulatory and Administrative Matters (2 items)

IRS REMINDS SMALL BUSINESSES TO CORRECTLY IDENTIFY WORKERS AS EMPLOYEES OR INDEPENDENT CONTRACTORS.  The IRS on September 15 issued a news release during National Small Business Week reminding business owners to correctly identify workers as employees or independent contractors. In the bulletin (IR-2021-186), the IRS reiterated its existing multi-part test for determining worker status. Formerly known as the 20-factor test, the test consists of three main components, each of which involves many sub-factors. The three categories are: behavioral control (does the company control or have the right to control what the worker does and how the worker does the job); financial control (does the business direct or control the financial and business aspects of the worker’s job, including  including method of payment, reimbursement of expenses, and who provides tools/supplies); and relationship of the parties (are there written contracts or employee-type benefits such as a pension plan, insurance, vacation pay, will the relationship continue, and is the work performed a key aspect of the business). The bulletin also addressed the Voluntary Classification Settlement Program, which few companies have chosen to participate in, as we first noted in a blog post in December 2012.

FEDERAL PANDEMIC UNEMPLOYMENT ASSISTANCE FOR IC’S CAME TO AN END IN SEPTEMBER 2021.  As we have reported in this blog, federal pandemic unemployment benefits, including payments to unemployed or under-employed individuals operating their own businesses as independent contractors, were scheduled to end as of September 6, 2021.  Prior to that date, 26 states had reportedly opted to end their participation in some or all of the federal benefits programs earlier than the formal expiration date set by Congress.  These benefits were first introduced in March 2020 as a response to the COVID-19 pandemic. Federal labor officials have reportedly suggested that states could use federal relief funds to extend their own unemployment support.

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