Past and present franchisees of commercial cleaning service franchisor, Jani-King, brought claims for violation of Connecticut minimum wage and anti-kickback laws, and unjust enrichment. They claimed Jani-King misclassified them as independent contractors rather than employees. A split panel on the Second Circuit Court of Appeal affirmed the district court’s dismissal of all claims but left open the potential for franchise relationships to be classified as employment relationships.

Jani-King sources cleaning customers, who enter into service agreements with the franchisees. Franchisee revenues flow from the franchisor to franchisees. Customers pay Jani-King directly. It then deducts fees, including royalty and advertising fees, before transferring the balance to franchisees. The franchisees claimed Jani-King’s fees violated prohibitions against deductions and against charging fees as a condition of employment. The district court dismissed the statutory claim and granted summary judgment on the unjust enrichment claim. The franchisees appealed and the Second Circuit affirmed.

The Second Circuit held that assuming franchisees were also employees who received wages subject to the Connecticut wage statute, their “wages” under Connecticut law amounted to the franchisees’ profits. Under the franchise agreement, funds remained after Jani-King deducted agreed fees. As franchisees, they agreed to the deductions in exchange for franchise rights. The court agreed there was no unjust enrichment to Jani-King.

The court rejected the franchisees’ argument, as it would preclude franchise relationships where a franchisor collects customer revenue prior to making payments to franchisees. A dissenting opinion urged referring the case to the Connecticut Supreme Court, to rule whether under Connecticut law plaintiffs were independent contractors, franchisees, employees, or a “dual status” combination of employees and franchisees at the same time.

It is notable that a federal appellate court ruled that franchisees can be employees for purposes of some state laws. Franchise counsel can guide franchise companies to structure their system to reduce the risk of misclassification. On the franchisee side, counsel can evaluate the relationship with the franchisor to determine if the client has sustainable claims premised on wearing franchisee and employee hats at the same time.