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Are Franchisees Now Employees?

The California Employment Development Department (EDD) thinks so. Following a recent precedent Tax Decision from the California Unemployment Insurance Appeals Board (CUIAB), the EDD is enforcing a new worker misclassification policy that affects franchisors and franchisees with businesses in California.

Traditionally, franchises have been given wide berth by the EDD in their relationship between franchisors and franchisees. This may no longer be the case following the CUIAB's decision in SuperShuttle International, Inc. v. EDD, in which the CUIAB determined that the subject franchisee/drivers were employees and not independent contractors.

There have also been recent labor law suits in federal court in which franchisees claimed they were incorrectly classified and should instead be classified as employees, for the purposes of wages and workers compensation insurance. See Alejandro Juarez, et al. v. Jani-King of California., and Awuah v. Coverall North America, Inc.

In SuperShuttle, the CUIAB found numerous factors common of an employer/employee relationship, such as drivers not having other businesses outside of their work for SuperShuttle; a lack of specially-skilled independent drivers; the requirement that drivers submit trip sheets; and a payment formula established solely by the franchisor.

An argument was made that SuperShuttle was merely exerting the level of control necessary to protect the brand standard of SuperShuttle; a control California courts have recognized as valid to protect a franchisor's interest in the reputation of its entire marketing system. In this case, the CUIAB found that the amount of control by SuperShuttle surpassed that which was required to protect SuperShuttle's brand and to consider the franchisees as independent contractors.

Problematic in this case was the fact that the drivers had previously been employees of SuperShuttle, and were then converted to the status of franchisees, with little other change in the relationship or activities of the parties.

The termination provisions were also a debated issue. The SuperShuttle termination provisions may have been beyond what would normally be included in a typical franchise agreement, despite being common to the franchise industry.

The EDD bases its tax enforcement policies in large part on rulings by the CUIAB, which in turn have a significant effect on businesses in California and out-of-state. One would reasonably predict that the SuperShuttle decision would apply to similarly situated franchisors of transportation services, as it includes elements specific to that of drivers and transportation providers. Instead, the EDD appears to be embarking on an audit program which focuses on franchise companies, transportation-based or not.

The federal case, Juarez v. Jani-King, is an especially important case in light of SuperShuttle. In a claim based mostly on alleged California Labor Code violations, a Federal District Court in California granted summary judgment for the defendant, janitorial franchisor Jani-King, finding Jani-King did not exercise sufficient control over the franchisees, who were the plaintiffs in this matter, to render them employees. Jani-King's business model involved selling franchises to individuals or entities, who then performed janitorial work for Jani-King's clients.

The court held that the Jani-King did not exercise "control beyond that necessary to protect and maintain its interest in its trademark, trade name, and good will" and thus did not establish a prima facie case of an employer-employee relationship.

The franchisees had the discretion to hire, fire, and supervise their employees, as well as determine the amount and manner of their pay. The franchisees had the contractual right to decline accounts and, in practice, they did so. The franchisees purchased their own cleaning supplies and equipment. They could bid their own accounts and sell their businesses. The franchisees decided when to service certain accounts. Overall, the franchise agreements expressly stated that the franchisees were independent contractors.

The controls imposed on franchisees were no more than necessary to protect Jani-King's trademark, trade name, and goodwill. Accordingly, it did not create an employer-employee relationship between Jani-King and the franchisees.

Jani-King is a win for franchisors, especially janitorial, in the area of labor and, ostensibly, employment taxes because if the Jani-King court held the franchisees were employees, then Jani-King of California would have been required to cover them under workers compensation insurance, and pay them at least minimum wage and overtime. As a probable corollary, the EDD would certainly have followed a contrary determination that the franchisees were employees for purposes of employment taxes.

SuperShuttle should be viewed, on one hand, as a decision which explains the factors that lead to drivers being classified as employees. On the other hand, SuperShuttle misapplies franchise case law, as it fails to (fill in the blank).. SuperShuttle's holdings, outside of those findings specific to traditional driver-related factors showing employment status, should instead be viewed in the light of Jani-King. While it seems reasonable that the CUIAB would find that some of SuperShuttle's requirements equivalent to an employer's control over its employees, it is absurd to think that a franchise-based transportation company would lose control over branding aspects, therefore bringing the courts to decide that something as simple as a choice of logo or color scheme renders the drivers as employees.

The drivers in SuperShuttle could very well have been found to be employees without the franchise consideration. In fact, it may have been better had the CUIAB left the franchise issue alone. Now it appears that the EDD will be going after franchisors, waiving SuperShuttle as its authority, and it may serve as good authority, if applied to on-point factual situations. If the facts, however, support a more typical franchisor/franchisee relationship, SuperShuttle should be "scuttled."

To learn more about these issues, and how they may affect your business, call our office at (916) 488-8501.

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