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Franchisor’s Misclassification of Franchisees – Do You “Like” Your Franchisee?

Expert Article by Richard S. Mulligan

In today’s social media world we are encouraged to become someone’s friend or to “like” something they say or do. Since long before the internet, franchisors have tried to attract people who will “like” their concept.  Franchisors develop systems that allow them to sell their goods and services, and they spend time, capital and human resources hoping to attract franchisees that will like their concept and be compatible business partners. The selection process is akin to dating, which then hopefully leads to a successful marriage.  Sometimes franchisors find themselves dealing with franchisees they never “dated,” let alone “married,” who somehow think they have a relationship. Other times, parties who agreed to be their franchisees now want to change the relationship through “divorce.”  When a business relationship turns sour, some people will claim to be a franchisor’s friend and others may claim that despite a franchise agreement, the franchisor is in fact their employer.

Classification and characterization of franchisees is a topic that is being litigated more frequently.  Recently, janitorial supply companies have been the subject of litigation where the franchisees claimed that instead of being independent contractors, they were in fact employees of the franchisor.  On the issue of improper classification as an independent contractor rather than as an employee, in Juarez v. Jani-King of California, Inc., 2012 WL 177564 (N.D. Cal.), a California district court granted Jani-King’s motion for summary judgment, ruling that the franchisor did not exercise sufficient control over the plaintiffs to render them employees.  Despite the fact that Jani-King imposed a number of controls on the franchisees, these controls were no greater than necessary to protect its trademark, trade name and good will.

Contrast this decision with the line of cases known as Awuah v. Coverall which have made their way through the Federal District Court of Massachusetts (Awuah v. Coverall, N. Am., Inc., 707 F.Supp.2d 80, 81 (D. Mass, 2010) (Awuah I) and 740 F.Supp.2d 240, 241 (D. Mass, 2010) (Awuah II)) and state court system (460 Mass. 484, 952 N.E.2d 890, Mass., 2011).  In Awuah I, the judge ruled that the Coverall franchisees were misclassified as independent contractors and found them to be employees.  The district court judge certified questions to theMassachusetts state court for a determination.  The state court ruled that Coverall as an employer, not as the franchisor, was required to repay “franchise fees” because in this context they amounted to requiring an employee to buy its job from an employer and was violative of public policy.  Additionally, payments made by the employee (franchisee) for workers’ compensation insurance were recoverable because it is against public policy to require an employee to agree that it is responsible to obtain and pay for workers’ compensation insurance.

Another recent case in the janitorial supply setting, Hayes v. Enmon Enterprises, LLC, dba Jani-King of Jackson and Jani-King Franchising, Inc. (2011 WL 2491375 (S.D. Miss.)), has raised eyebrows because of its holding that a franchisor may be vicariously liable for the negligence of its franchisee.  In this case, Jani-King, in its motion for summary judgment, was unable to convince a United States district court judge inMississippi that it was not liable as a matter of law when a customer of one of its franchisees slipped and fell on the restroom floor and injured himself.  The injured party claimed that there was no “wet floor” sign warning of the wet conditions. The franchisor was unsuccessful in its motion for summary judgment in part because the judge held that the franchise agreement more closely resembled the characteristics of an employer-employee relationship.  Looking at 10 factors delineated by the Mississippi Supreme Court to establish an employer-employee relationship, the court found there were five factors suggesting that the franchisee was an independent contractor and five factors suggesting an employer-employee relationship.  Although a close question, the court ruled that the franchise agreement demonstrated such a level of control over the franchisee’s conduct that it was unwilling to find that an independent contractor relationship was created.  It remains to be seen what will happen when the case goes to trial, but because slip and fall cases routinely occur in franchised locations and rarely has a franchisor been held vicariously liable for the negligent acts of its franchisee, it will be an important case to follow.

Another interesting twist in the area of properly classifying the relationship between a franchisor and franchisee is insurance agents.  When Allstate New Jersey Insurance Company took actions to terminate some of its insurance agents for failure to meet certain, expected results, one agent filed suit in MarcoDeLuca v. Allstate New Jersey Insurance Company(unreported Bergen County Superior Court) claiming that he was a franchisee who was entitled to the protection of the New Jersey Franchise Protection Act.  The New Jersey Act provides that there must be good cause for termination.  The case is set for summary judgment, and attempts to remove it to federal district court have been unsuccessful as the district court has remanded the case back to the Superior Court of New Jersey. Connecticut has ruled in the past that insurance agents may be franchisees (see Charts v. National Insurance Company, 397 F.Supp. 2d 357 (D. Conn. 2005)), while other states have not elevated insurance agents to the status granted to a franchisee.

Another business structure that is widely utilized is the supplier-distributor relationship.  Often, when the distributor sells less of the supplier’s product than is expected, the supplier will terminate the relationship.  When faced with termination, the distributor will often look at its supplier and try to change the relationship to one of franchisor-franchisee so it receives the protection that state franchise laws provide.  In Echo v. Timberland Machines & Irrigation, Inc. (2011 WL 148396, N.D. Ill., 2011), Timberland, a Connecticut-based distributor of Echo’s products, was given notice of termination and unpaid invoices.  Timberland counterclaimed that Echo violated the Connecticut Franchise Act.  To receive the protection of the Act, Timberland had to establish that its business was substantially associated with the Echo trademark and, because its Echo sales accounted for only 30 to 35 percent of its total sales and gross profits, it was unable to do so.  The Illinois court, applyingConnecticut law, granted summary judgment for Echo.  The court found that because Timberland’s business with Echo never amounted to more than 50 percent of its business, they were not substantially associated with each other and therefore were not franchisor and franchisee.  The Seventh Circuit Court of Appeals affirmed the district court’s granting of summary judgment in Echo, Inc. v. Timberland Machines & Irrigation, Inc.(661 F.3d 959, C.A. 7 (Ill.), 2011).

The janitorial cases, insurance agent cases and distributor-supplier cases are all illustrations of the lengths to which parties will go to either establish a franchise relationship or to disassociate from one another to make the franchisor-franchisee relationship into something not originally contemplated when the parties first met and signed a franchise agreement.  So in today’s world, even though you may choose to “like” someone and they you, the relationship can sour – and you can also find yourself being “liked” or “disliked” when you really don’t want to reciprocate.

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This entry was posted on Wednesday, May 2nd, 2012 at 9:00 AM and is filed under Expert Guest Blog Entries, Litigation, Telecoms & Technology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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