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Franchisor Beware

There are currently two “employer/employee” issues that could be of major concern to franchisors, one which has been previously discussed in my prior postings and one which is a new menace for companies and franchisors in California.

Joint Employer Status

Joint employer status arises when employees claim that they work for not one but two “employers” thus making both “employers” liable for tax withholding, employment benefits, wage & hour violations, etc. For years the National Labor Relations Board (NLRB) had applied a test which required that to be held as a joint employer, a company had to be shown to not only have the power to exercise control over a workforce’s terms and conditions of employment but also had to be shown that such company had actually exercised that control over the working environment. Exercising such control would include hiring and firing, setting wages and working schedules, etc.

The typical franchise agreement has always provided the franchisor with certain powers to insure the franchisee was in compliance with the franchise agreement and Operations Manual (prepared by the franchisor) in order to promote and maintain uniformity within the franchise network. However, so long as the franchisor avoided involvement in the day-to-day activities of a franchisee’s employees, the franchisor was considered safe from being held as a joint employer of the franchisee’s employees.

However, as I posted back in September 2015, in 2015 the NLRB made a decision in Browning-Ferris Industries in which the Board adopted a new test to determine when joint employment was present. Under the new test a company only had to possess the potential to exercise control over a workforce’s terms and conditions of employment regardless of whether the company had actually exercised that power. Needless to say, this sent shock-waves throughout the franchise industry. Under the new test, a franchisee’s employees could argue that the franchise agreement provided each franchisor with sufficient power (whether or not actually exercised) to satisfy the new test and make the franchisor a joint employer and thus jointly liable for any and all work place violations occurring at a franchisee’s establishment!

Sensing the disaster the Browning-Ferris decision posed, in 2017 the NLRB, in deciding the matter of Hy-Brand Industrial Contractors, over-ruled the Browning-Ferris test and reinstated the traditional test which had been in place prior to the Browning-Ferris decision (ie power to control + actual exercise of that power). Unfortunately the relief felt by all franchisors was short-lived as the NLRB’s Inspector General issued a subsequent finding that one of the Board’s members deciding the Hy-Brand case had a conflict of interest and should not have voted. As a result, the Hy-Brand decision was vacated earlier this year thus reinstating the Browning-Ferris test for defining joint employer status.

However, good news might be on the way for employers and franchisors. The newly appointed NLRB Chairman, John Ring, has promised to consider rulemaking to modify the current standard the Board uses to evaluate whether joint-employment exists. So, stay tuned for the next episode of this continuing saga.

Additional good news for franchisors was delivered in April, 2018, when the federal US District Court for the Central District of California granted summary judgment in favor of franchisor, 7-Eleven, Inc., finding that 7-Eleven was not a joint employer of franchisees’ employees under California law or federal law. In that case, employees of four 7-Eleven franchisees brought suit against franchisor 7-Eleven, Inc. alleging the franchisor was jointly liable for violations of the federal Fair Labor Standards Act (FLSA) and the California Labor Code.

Independent Contractor vs. Employee

The California Supreme Court has recently decided a case which could have a profound effect on franchisors/franchisees and indeed the entire gig economy. For nearly three decades California courts have determined an individual’s status as an “employee” or “independent contractor” using a multi-factor test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations. The Borello test provided that an individual hired as an independent contractor was presumed to be an independent contractor unless the application of the multi-factor test clearly indicated that such individual was in reality an employee and not an independent contractor. Under this test, the individual had the burden of proof to show he/she was in fact an employee.

However, in April, 2018, the California Supreme Court, in the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, abandoned the Borello test in favor of a new test referred to as the “ABC Test” that is used by some other states.

Under the ABC Test a worker is presumed to be an employee (regardless of what the terms of hire stated) and it is up to the hiring company to prove that the worker is indeed an independent contractor by showing:

  • The individual is free from the employer’s control and direction;
  • The individual performs work that is outside the usual course of the employer’s business;
  • The individual customarily engages in an independently established trade, occupation, profession or business of the same nature as that involved in the work performed.

So hiring an attorney, accountant or janitorial company would still be deemed independent contractors, but many other workers hired as independent contractors to perform specific projects for high tech companies or drivers for Lyft and Uber, for example, would now be subject to scrutiny as potential employees unless the hiring company can meet the ABC Test to show such individuals are properly classified as independent contractors. Indeed several independent contractor groups including Lyft drivers have already filed lawsuits claiming they are misclassified as independent contractors and should be declared employees instead with all the rights and benefits an employee is entitled to.

In light of the above, one can well imagine the consequences this decision could have on the franchising industry in which franchisees have always been deemed independent operators of their own business and not as employees of the franchisor.

This is a proverbial “sea change” in the employee – independent contractor analysis and is undoubtedly on its way to the US Supreme Court for a final decision.

Article by Roger D. Linn © Barnett & Linn

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