FRANCHISOR 101: Are Franchisees Your Employees?

by Lewitt Hackman
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Lewitt Hackman

Prudent franchisors have been reducing their apparent control over franchisees' employees to reduce the risk of becoming joint employers of those employees. But could a franchisor's control over the franchisees themselves be used to prove that franchisees are the franchisor's employees?

In Matter of Baez, the Unemployment Insurance Appeal Board determined that franchisees of Jan-Pro Cleaning Systems, a janitorial franchisor, were Jan-Pro's employees. The Board held Jan-Pro liable as an employer to pay unemployment insurance contributions on payments it made to franchisees.

A New York appeals court said the Board may find an employment relationship if "substantial evidence" shows that an alleged employer "exercises control over the results produced or the means used to achieve the results," and said that control over the means is the more important factor. The court found there was sufficient evidence that Jan-Pro exercised such control over franchisees.

This was because Jan-Pro:

(i) Assigned geographic territories to franchisees;

(ii) Required franchisees to be trained, which Jan-Pro paid for;

(iii) Required franchisees to operate according to Jan-Pro's procedures and standards, including using only pre-approved equipment and supplies;

(iv) Could claim ownership of concepts or techniques created by franchisees;

(v) Had a contractual non-compete provision against franchisees for 1 year after termination;

(vi) Helped resolve complaints between franchisees and their clients;

(vii) Had the right to discontinue franchisees' services to any of their clients;

(viii) Provided franchisees with a starter set of business cards bearing Jan-Pro's logo, and had to approve any franchisee-designed business cards before use; and

(ix) Had the sole right to bill and collect payments from franchisees' clients.

As a result, the court upheld the Board's ruling against Jan-Pro.

Experienced franchisors will recognize much of the court's assembled "evidence of control" as common features of franchise systems. But franchisors may distinguish themselves from Jan-Pro, and hopefully avoid the same fate, by:

A) avoiding, to the extent possible, inserting themselves between franchisees and their customers as Jan-Pro did in points (vi) through (ix) above; and

B) charging franchisees a distinct "initial training fee," instead of offering training "for free" as Jan-Pro did (point (ii) above).

The latter may be potent counter-evidence against a finding of employment because employees rarely pay their employers for the right to be trained.

See In the Matter of Baez, N.Y. Sup. Ct., App. Div., ¶15,878

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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