Who the Boss

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					                                                                          by Rochelle B. Spandorf




Who’s
 the Boss?           Franchisors must be able to demonstrate
the separate and distinct businesses
                                                 that they and their franchisees operate
OWNING A F RANCHISE has                          have been winning “employee misclassifica-          practitioners must now arm themselves appro-
always seemed to guarantee a franchisee’s        tion” lawsuits, in which they (or their own        priately to assist their franchisor clients in
legal status as an independent contractor—the    employees) or government agencies acting           reducing exposure for misclassification law-
right to be one’s own boss. Specifically, fran-   on their behalf have recovered unpaid wages,       suits.
chisees pay a fee for the right to use a fran-   unpaid employer taxes, unemployment com-
chisor’s brand name and business concepts in     pensation, or other employee benefits from the      Misclassification Defined
operating their own business and have the        hiring firm. Now, with a decision issued last       Individuals who perform services in exchange
ability to sell the business. These character-   year, franchisors face the prospect of their own   for compensation fall into one of two cate-
istics are distinctly at odds with employment    exposure for misclassification.                     gories: employee or independent contractor.3
relationships. Employees, after all, do not          In March 2010, in an apparent case of first     The traditional common law distinction turns
pay for the right to be hired and have no        impression, a Massachusetts district court in      on the amount of control that the hiring
business to sell.                                Awuah v. Coverall North America, Inc.,1
    However, simply calling an arrangement       found a franchisor liable for misclassifying its   Rochelle B. Spandorf, a State Bar of California
a franchise does not guarantee that a court or   franchisees as independent contractors. The        certified specialist in franchise and distribution
government agency will not reclassify the        decision has rocked a significant sector of         law, is a partner in the Los Angeles office of Davis
                                                                                                                                                           KEN CORRAL




franchisor’s franchisees as employees. Outside   the U.S. economy that has always thought           Wright Tremaine LLP. She is the past chair of the
of the franchise context, workers retained       franchise arrangements were immune to              ABA Forum on Franchising and the State Bar of
by companies as independent contractors          employee misclassification claims.2 California      California Franchise Law Committee.

18 Los Angeles Lawyer March 2011
party imposes over how the assigned work is          from misclassification as $5 billion annually        under different names, including dealership,
performed.4                                          in lost taxes, Social Security contributions, and   distributorship, license, strategic alliance,
     Different statutory tests of employee sta-      penalties. As a result, it has significantly        joint venture, and marketing alliance, among
tus exist at the federal and state levels, and       stepped up its enforcement activities.16 With       others.22
these override common law. 5 Multiple                swelling unemployment and dwindling trea-               While nonfranchises are unregulated pri-
employment tests, each with different crite-         suries, state governments, too, have cracked        vate consensual arrangements, franchise rela-
ria, may exist within the same jurisdiction.6        down by passing legislation to expand the def-      tionships are highly regulated. In the United
While two jurisdictions may adopt the same           inition of who is an employer under state           States, franchisors are subject to a compre-
employment test, judicial interpretations may        employment laws and by beefing up enforce-           hensive federal presale disclosure law. Some
produce different outcomes despite similar           ment and coordinating state investigations          15 states add additional disclosure and filing
facts. Consequently, a company with work-            with the Internal Revenue Service.17                duties.23 Another two dozen states restrict the
ers in different states, or even within the              Serious financial liabilities cascade from       conditions under which a franchise may be
same state, may find its workforce classified          employee misclassification. Companies that           terminated or not renewed.24 Some states
differently depending on where a person              misclassify workers face potential penalties        dictate substantive terms for the franchise
works or what is at stake.7                          for:                                                relationship.25 A franchisee cannot waive
     Cost is the primary reason companies            • Not paying workers minimum wage, over-            these statutes even if it wants to. 26
seek to classify their workers as independent        time pay, or for meal and rest periods.             Furthermore, many franchise laws impose
contractors.8 Employee costs typically add 30        • Not documenting time worked or issuing            joint and several personal liability on the
percent to the personnel expenses of a busi-         itemized paycheck statements.                       franchisor’s owners and key management for
ness compared to retaining contract workers.9        • Not withholding state and federal income          a franchisor’s statutory mistakes.27
Employers must pay payroll taxes, unem-              taxes (resulting in employer liability for              Nonfranchise arrangements typically pos-
ployment insurance, disability and workers’          unpaid taxes).                                      sess the first two statutory elements of a fran-
compensation coverage, Social Security con-          • Not paying the employer portion of Social         chise—the trademark license and marketing
tributions and other employer taxes, and             Security and Medicare taxes.                        plan or community of interest. The trade-
possibly overtime pay. Retaining indepen-            • Not paying state and federal unemployment         mark license may be expressed in the parties’
dent contractors allows a company to bypass          taxes.                                              contract or implied in the parties’ relationship
all these costs. Using independent contractors       • Not paying workers’ compensation insur-           by virtue of the licensee deriving more than
also 1) eliminates worries about timely wage         ance.                                               an insignificant percentage of its overall rev-
laws, rest period laws, and medical leave                If a reclassified worker has his or her own      enue from the distribution or sale of the licen-
rules, 2) reduces the likelihood of vicarious lia-   employees, misclassification liability extends       sor’s branded merchandise or services. The
bility for a worker’s acts or omissions, 3)          to those individuals as well. Besides taxes         marketing plan and community of interest are
thwarts labor unions from organizing work-           and penalties, companies may be vicariously         expressed through various assistance or con-
ers, and 4) spares a company from having to          liable for the acts and omissions and past          trols that licensors provide to, or impose on,
offer contract workers the same discretionary        discrimination of their reclassified workers.        independent operators, such as minimum
benefits as employees—such as stock options,          Additionally, misclassification can support          purchasing obligations, product and sales
vacation and sick leave, health insurance,           claims for unfair business practices and even       training, sales scripts and demonstration kits,
and retirement benefits.10                            criminal penalties.18                               exclusive territories, mandatory merchan-
     To stay lean, especially in a down econ-                                                            dising requirements, prohibitions against car-
omy, businesses not only pare their workforce        Distinguishing Franchise and                        rying competing merchandise, trade dress
but also outsource worker functions to con-          Nonfranchise Independent Contractors                requirements, and financial reporting and
tract, freelance, seasonal, and temporary            Franchise and nonfranchise relationships are        accounting protocols.28
workers, whom the businesses classify as             similar methods for enabling a company to               What most commonly distinguishes fran-
independent contractors.11 Indeed, in bad            enlist others—presumed to be independent            chises from nonfranchises is the third statu-
economic times, companies are known to               contractors—to offer, sell, or distribute the       tory element—the payment of a required fee.
fire employees only to hire them back to             company’s goods and services at retail or           Distributors and dealers typically buy inven-
perform their old jobs as independent con-           wholesale. Operationally, little separates fran-    tory from a supplier for resale, sales agents
tractors.12                                          chise and nonfranchise arrangements.                procure third-party purchase orders, and all
     Misclassification results when a business        However, from a regulatory perspective, fran-       may perform postsale merchandising duties.
improperly classifies its employees as inde-          chises and nonfranchises are as different as        Nevertheless, their payments do not qualify
pendent contractors. For workers, misclassi-         night and day.19                                    as a required fee.29
fication suits are a means to recover unem-               Franchises are strictly creatures of statute.       Under the franchise laws, inventory
ployment compensation and other employee             They are classically defined by the presence         bought for resale at bona fide wholesale prices
benefits or rectify workplace offenses, includ-       of three elements: 1) a trademark license, 2)       is expressly excluded from the definition of a
ing discrimination and harassment. For the           significant assistance offered to, or control        required fee.30 Payments to third parties for
government, misclassification suits not only          over, the licensee’s business, which may take       operating expenses are not required fees
protect workers but also generate significant         the form of a prescribed marketing plan or          because they are not paid to the trademark
revenue and advance a public policy that             what some jurisdictions more broadly describe       licensor. The classic distributorship, dealer-
requires employers to shoulder a share of            as a community of interest, and 3) payment          ship, and sales agency is not a franchise
public welfare costs.13 Consequently, courts         of a required fee to the brand owner for the        because the distributor, dealer, or sales agent
and government agencies interpret employee           right to use or associate with the brand own-       pays no required fee to the supplier to asso-
status tests broadly.14 Workers are presumed         er’s trademark.20 If any one statutory ele-         ciate with the supplier’s brand.
to be employees unless the hiring firm can            ment is missing, the relationship is not a fran-        The payment of a required fee has been
prove otherwise.15                                   chise.21 What the parties call their relationship   assumed to be an essential fact keeping fran-
     The federal government estimates its losses     is irrelevant. Franchises often masquerade          chise relationships distinct from employment

20 Los Angeles Lawyer March 2011
relationships. A telltale sign of an employment    drivers who performed freight pickup and          as well as the contract’s Texas choice-of-law
relationship is that the employer, not the         delivery services in California. EGL required     provision. In doing so, the court concluded
employee, supplies the tools of work, and          its drivers to sign contracts acknowledging       that the issue of whether drivers were entitled
the employee pays nothing for the right to be      their status as independent contractors. The      to benefits under the California Labor Code
hired. However, the payment of a required          drivers argued they had been improperly clas-     was determined by statute rather than specific
fee—the fact that legally separates franchises     sified as independent contractors and sought       contract terms or even the existence of a con-
from nonfranchises—may be unimportant              overtime pay, expense reimbursements, and         tract between the parties.35
to whether a franchisee is truly independent       meal periods under the California Labor
and not the franchisor’s employee.                 Code.                                             Misclassifying Franchise Independent
                                                       The multifaceted common law test              Contractors
Misclassifying Nonfranchise                        applied by the Ninth Circuit to determine the     When analyzing misclassification issues in
Independent Contractors                            drivers’ status was comparable to the test fol-   the context of franchise relationships, it is
Employee misclassification cuts across all         lowed by the federal government and 23            important to remember that a primary attrac-
industries, including such varied occupations      other states, which focuses on whether the        tion of purchasing a franchise business is
as seasonal farm workers, healthcare work-         putative employer has the “right to control”      independence. Classification as an indepen-
                                                                                                     dent business owner is exactly how the fran-
                                                                                                     chisee sees itself, at least at the outset of the
                                                                                                     franchisor-franchisee relationship.36
                                                                                                          Nevertheless, last year’s headline-grab-
                                                                                                     bing Awuah decision37 pushed this attrac-
                                                                                                     tion aside in ruling that a commercial clean-
                                                                                                     ing franchisor had incorrectly classified its
                                                                                                     Massachusetts franchisees as independent
                                                                                                     contractors instead of employees.38 The court
                                                                                                     applied Massachusetts’s “ABC” test for the
                                                                                                     definition of “employee”—a three-prong test
                                                                                                     for unemployment compensation that more
                                                                                                     than half of the states (but not California) fol-
                                                                                                     low in some form. The result was a finding
                                                                                                     that Coverall, the franchisor, failed to prove
                                                                                                     that its franchisees performed a service out-
                                                                                                     side of Coverall’s usual course of business—
                                                                                                     a necessary element to proving independent
                                                                                                     contractor status under Massachusetts law.39
                                                                                                          Like all franchisors, Coverall required
                                                                                                     its franchisees to perform services following
                                                                                                     its detailed operating standards, which
                                                                                                     allowed Coverall to maintain its strong
                                                                                                     brand identity. Coverall provided its prospec-
                                                                                                     tive franchisees with a franchise disclosure
                                                                                                     document explaining these requirements
                                                                                                     and a franchise agreement identifying the
                                                                                                     franchisee as an independent contractor.
                                                                                                     Franchisees wore uniforms and identification
                                                                                                     badges with Coverall’s logo and completed
ers, and construction workers. In California,      the worker’s actions. Taking a “common            mandatory training. Like other janitorial
nonfranchise courier services have been            sense” approach in analyzing the facts, the       franchise systems, Coverall priced and sold
favored targets of misclassification lawsuits.      Ninth Circuit regarded the parties’ mutual at-    its franchises as a bundle of prenegotiated
In 1999, FedEx drivers brought a misclassi-        will termination rights as “a substantial indi-   customer contracts, gave franchisees initial
fication lawsuit under California law for lost      cator of an at-will employment relation-          supplies, retained the exclusive right to nego-
overtime and expense reimbursements. Nearly        ship.”34 The record also showed that EGL          tiate new cleaning contracts (including set-
10 years later, FedEx settled the case by agree-   controlled driver schedules, including vaca-      ting prices), and handled customer billing
ing to pay over $27 million in damages and         tion periods; disciplined drivers who showed      and collection. It paid franchisees the balance
legal fees.31 In 2007, California’s Department     up late; required drivers to display EGL’s        of collections after deducting its royalty and
of Industrial Relations penalized JKH              trademark on their trucks and uniforms; and       other fees.
Enterprises, a small courier business, $1,000      described the drivers’ job in driver training          Filed in 2007 as a class action by Cover-
per worker for misclassifying its drivers as       materials as key to EGL’s entire shipping         all’s Massachusetts franchisees, Awuah had its
independent contractors.32                         process. Drivers attended meetings about          origins in 2004, when a single Coverall fran-
    In a July 2010 California courier mis-         company policies, used company forms, and         chisee filed for unemployment compensation
classification case, Narayan v. EGL, Inc.,33 the    followed detailed instructions on how to          after Coverall terminated her franchise. The
Ninth Circuit overturned a summary judg-           conduct themselves.                               franchisee’s relationship with Coverall began
ment awarded to Eagle Freight Systems, a               The court rejected the self-serving provi-    as an employee of another franchisee for
Texas-based global transportation company,         sion in EGL’s contract regarding the inde-        whom she worked exclusively at one nursing
and reinstated employment claims brought by        pendent contractor classification of the drivers   home. When the franchisee left the system,

                                                                                                                        Los Angeles Lawyer March 2011 21
leaving the employee without a job, Coverall       Franchising allows trademark owners to grow           make them responsible for the licensee’s mis-
sold the employee a franchise allowing her to      without the attendant overhead costs of hir-          takes. While licensors have used the brand-
continue working at the same nursing home.         ing and supervising employees to manage               justification defense to defeat vicarious liability
After Coverall terminated her franchise, she       new locations. Moreover, as long as the fran-         claims, they have not had equal success with
filed for unemployment compensation and             chisee’s business remains profitable, there is         the argument to defeat misclassification lia-
ultimately won benefits on appeal. As luck          no reason a franchisee would question its             bility.
would have it for Coverall, in 2006 the high-      classification as an independent contractor.               Misclassification and vicarious liability
est court in Massachusetts chose on its own            However, as Awuah demonstrates, things            involve different legal issues and policy con-
to review the state agency’s appellate decision    can change when relationship problems sur-            siderations. The legal tests to prove employee
in the matter. After doing so it upheld its        face or an independent operator’s business            status are different than the tests to prove
analysis of the independent contractor statute     fails. This is true whether the operator is a         agency, and the political stakes in employee
in Massachusetts as applied to the state’s         franchisee or a nonfranchise independent              misclassification cases are significantly higher
unemployment compensation rules, agree-            contractor. To a so-called independent con-           than in vicarious liability cases, since mis-
ing that the franchisee was not engaged in an      tractor facing the sudden at-will cancellation        classification involves multiple victims—
independently established trade apart from         of affiliation rights or left without a livelihood,   including the contractor-worker as well as the
Coverall.40                                        employee status offers a financial bailout.           governments (federal, state, and local) that are
     Awuah, the class action, was filed in fed-     Overtime pay for long hours worked, unem-             denied their tax revenue.
eral court on the heels of the 2006 ruling by      ployment benefits, Social Security contribu-               Undoubtedly more franchisee misclassifi-
the same lawyers who had won the individ-          tions, and medical benefits make employee              cation claims will follow after Awuah, espe-
ual misclassification lawsuit. In the class        status look like a far better deal than being         cially if the economic recession continues to
action, the lawyers sought damages on behalf       one’s own boss.                                       increase franchisee terminations. With the
of all Massachusetts Coverall franchisees for          Franchise or not, misclassification claims         right facts, it should surprise no one if
employment misclassification under the same         require the application of the appropriate            California franchisee plaintiffs prevail in
Massachusetts independent contractor statute       legal test to determine the validity of a com-        extending Narayan and the reasoning of cases
analyzed in 2006. The result was a grant of        pany’s unilateral decision to classify workers        like Awuah to California franchisees.
summary judgment on behalf of the plaintiffs.      as independent contractors. Awuah suggests
The court rejected Coverall’s argument that        that a worker’s payment of a required fee—            Indicia of Potential Vulnerability
it was engaged in a different business than its    the fact that typically separates franchises          In misclassification lawsuits, the outlook for
franchisees. Even though Coverall never            from nonfranchises—is not dispositive to the          franchise and nonfranchise companies is sim-
engaged in any cleaning services, the court        classification issue. The express or implied           ilar. Given the recent successes of misclassi-
found that Coverall and its franchisees are in     trademark license—a characteristic that fran-         fication cases and the significant dollars at
the same business—selling janitorial cleaning      chise and nonfranchise programs share—                stake, private and public enforcement efforts
services to end users. The court noted that        appears to supply the legal foundation for            will continue to proliferate.43 Awuah in the
Coverall negotiated all customer contracts; set    franchisees to bring misclassification law-           franchise context and Narayan in the non-
prices; handled back office billing and col-       suits like their nonfranchise counterparts.           franchise context expose the vulnerability of
lection functions; controlled cleaning meth-           Federal trademark law requires trade-             self-proclaimed independent contractor
ods; provided uniforms, badges, and initial        mark owners, whether they are franchisors or          arrangements, especially when the contractor
supplies; and took a percentage of every           not, to control the quality and uniformity of         has no bricks-and-mortar base of operations.
cleaning job performed.                            the goods and services associated with their          This is a worrisome development in an era of
     After ruling on the summary judgment          brand or otherwise risk abandonment of                proliferating contract, freelance, temporary,
motion, the court allowed the four named           trademark rights. Consequently, both in the           and seasonal workers, along with shrinking
plaintiffs to try their employment claims          franchise and nonfranchise arenas, brand              payrolls and dwindling tax revenues.44
before a jury, which they did unsuccessfully       owners must dictate detailed standards and                Of course, not all franchise and nonfran-
in May 2010. The plaintiffs were unable to         specifications over a licensee’s distribution          chise independent contractor arrangements
prove they had suffered any real damages as        activities.42 A licensor’s specified operating         are equally vulnerable. It is important to
a result of the misclassification.41                controls can easily resemble workplace rules.         underscore the similar characteristics of the
     Despite the positive ending for Coverall,     This is especially true when a licensee has nei-      truck drivers in Narayan and franchisees in
the court’s initial ruling remains intact and      ther a workforce of its own nor bricks-and-           Awuah—characteristics prototypical of poten-
puts at risk many fundamental assumptions          mortar locations and operates as a sole pro-          tial misclassification claimants:
about franchise relationships. Until Awuah,        prietor, such as the plaintiffs in Narayan            • Small businesses with few, if any, employ-
franchisors thought that by collecting a           and Awuah. Under these facts, the licensee            ees.
required fee and adding a franchise veneer to      looks less like an independent business owner         • Sole proprietorships, not legal entities.
their independent contractor arrangements,         and more like an employee, which makes it             • Workers without a bricks-and-mortar pres-
they were safe from the kinds of employee          difficult for licensors to convince a trier of        ence who perform services at home, in the
misclassification claims that nonfranchise         fact that operating controls are entirely             field, or at the customer’s location.
distribution systems have faced for years.         brand-justified.                                       • Workers who make minimal investments in
However, in reclassifying the franchisees as           Licensors are accustomed to defending             equipment to perform their jobs and drive
Coverall’s employees, the Awuah court paid         quality controls as justifiable in support of the      their own or a company-furnished vehicle to
little attention to the plaintiffs’ upfront pay-   brand. Not infrequently, licensors are sued by        job sites when work is performed away from
ments to purchase accounts.                        third parties under agency theories for acts or       home.45
                                                   omissions by licensees. In defense, licensors             These characteristics fit a broad assortment
Unsurprising Results                               cite the brand purpose of their controls to           of contract worker arrangements across all
Companies turn to franchising to expand            explain why the licensee’s use of their brand         industries, backgrounds, and incomes, both
their footprint using other people’s money.        does not make the licensee their agent or             franchise and nonfranchise. They can be

22 Los Angeles Lawyer March 2011
found in businesses in which workers repair         employees, suppliers, and customers in obvi-                State, 28 BUFF. PUB. INT. L.J. 105, 130 (2009-10) [here-
homes, clean offices, bathe pets, tutor chil-       ous places like invoices, purchase orders,                  inafter Moran].
                                                                                                                9 http://smallbusiness.chron.com/costs-employee
dren, operate courier services, or perform          advertising, business cards, in-store signs,
                                                                                                                -vs-independent-contractor-1077.html (last visited Dec.
senior care or home healthcare services. They       and the like of the independence of the fran-               15, 2010).
also describe contract workers with special         chisee’s business. A franchisee should note                 10 Vizcaino v. Microsoft Corp., 97 F. 3d 1187, 1189

skills or higher levels of education, including     that while it operates under a license from a               (9th Cir. 1996).
                                                                                                                11 http://www.insidecounsel.com/Issues/2010/July-2010
computer trainers, freelance journalists,           franchisor, the franchisor is not responsible
                                                                                                                /Pages/Worker-Misclassification-Under-Fire-from
graphic designers, software programmers,            for the franchisee’s activities or financial
                                                                                                                -Federal-and-State-Agencies.aspx (last visited Dec. 15,
and business coaches.                               obligations.                                                2010).
    The franchisees in Awuah fit this profile.            Any company that enlists others to dis-                 12 Moran, supra note 8, at 122-23.

They were reclassified as employees because          tribute its branded goods or services faces two             13 http://www.auditor.leg.state.mn.us/ped/pedrep

Coverall could not convince the court that its      potential dire outcomes. It can belatedly learn             /missclass.pdf (last visited Dec. 15, 2010).
                                                                                                                14 http://www.labornotes.org/2010/03/when’s-worker
program for training and licensing others to        that its independent contractor network is a
                                                                                                                -contractor-when-boss-wants-cheat (last visited Dec. 15,
operate a janitorial business was a separate        franchise and face liability for violating fran-            2010).
and distinct business apart from the fran-          chise laws. Also, it can misclassify its fran-              15 Narayan v. EGL, Inc., 616 F. 3d 895, 900 (9th Cir.

chisees’ cleaning service. Undoubtedly,             chisees as independent contractors and face                 2010) (citing Robinson v. George, 16 Cal. 2d 238, 242
Coverall was doomed by bad facts.                   liability for violating employee status laws.               (1940)).
                                                                                                                16 http://www.patriotsoftware.com/Employer-Training
                                                    Experienced legal counsel can offer struc-
Taking Precautions                                                                                              -Blog/bid/31442/Misclassifying-Independent-Contractors
                                                    turing alternatives to keep a distribution pro-             -More-Legislation-Pending (last visited Dec. 17, 2010).
By choosing to franchise a business model,          gram outside the ambit of franchise laws and                17 http://www.nyreport.com/articles/77158/how_the

franchisors should be able to accentuate the        guide a company in implementing sound                       _government_is_going_after_employee_misclassification
separate and distinct businesses that they and      practices to maximize legal defenses to                     (last visited Dec. 17, 2010).
                                                                                                                18 JKH Enters. v. Department of Indus. Relations, 71
their franchisees operate. Franchisors are in       employee misclassification claims.
                                                                                                                Cal. Comp. Cas. 1257 (2006).
the business of designing uniform operating             Misclassification cases are fact-intensive               19 Rochelle B. Spandorf, Franchise Player, LOS ANGELES
systems and protocols, recruiting network           statutory claims that are expensive to defend,              LAWYER, Dec. 2006, at 34.
members, training recruits, running market-         impervious to self-serving contract provi-                  20 Two California statutes regulate franchises and

ing campaigns, developing brand identity,           sions, susceptible to class certification, resis-            define the term “franchise” in an identically substan-
and protecting the licensed brand. Some fran-       tant to pretrial summary dismissal, and costly              tive way: the California Franchise Investment Law,
                                                                                                                CORP. CODE §31005 (franchise sales); and the California
chisors do more: they source ingredients and        to lose. While neither franchisors nor their
                                                                                                                Franchise Relations Act, BUS. & PROF. CODE §20001
supplies, perform procurement and pur-              nonfranchise counterparts seek to face these                (franchise relationships).
chasing functions, supply point-of-sale com-        actions, of the two franchisors ultimately                  21 Federal and state franchise laws do not define “fran-

puter solutions, and provide support for            may have the better prospect for defeating                  chise” uniformly.
                                                                                                                22 Gentis v. Safeguard Bus. Sys., 60 Cal. App. 4th
back-office billing, accounts receivable, and       misclassification claims.                      I
                                                                                                                1294 (1998) (distributorship held to be franchise);
bookkeeping. Franchisees, by contrast, are in
                                                                                                                To-Am Equip. Co. v. Mitsubishi Caterpillar Forklift
the business of selling branded goods or ser-       1 Awuah v. Coverall N. Am., Inc., 707 F. Supp. 2d 80
                                                                                                                Am., 152 F. 3d 658, 659-60 (7th Cir. 1998).
vices to customers.                                 (D. Mass 2010).                                             23 Some states with filing requirements subject franchise
                                                    2 Franchise businesses with at least one employee
    Franchisors can proactively enhance their                                                                   disclosure documents to a full review. California is
                                                    account for 11% of the nation’s businesses. http://www
position that their franchisees are independent                                                                 among this group. Other states utilize a notice-filing sys-
                                                    .ibtimes.com/articles/62257/20100914/census-franchise
contractors. As precautionary steps, they                                                                       tem.
                                                    -business.htm (Sept. 14, 2010).                             24 California’s Franchise Relations Act requires a fran-
should:                                             3 For general guidance on the various employee tests,
                                                                                                                chisor to have good cause to terminate or refuse to
• Provide franchisees with best practices           see Phillip R. Maltin, By Any Other Name, L OS
                                                                                                                renew a franchise regardless of the contractual language
advice but actively police only those stan-         ANGELES LAWYER, Sept. 2001, at 53, and R. Carlson,
                                                                                                                agreed to by the parties. BUS. & PROF. CODE §§20020,
                                                    Why the Law Still Can’t Tell an Employee When It Sees
dards that are truly essential to brand iden-                                                                   20021, 20025.
                                                    One and How It Ought to Stop Trying, 22 BERKELEY            25 For example, California’s Franchise Relations Act
tity and confine controls to those that can be       J. EMP. & LAB. L. 295 (2001) [hereinafter Carlson].
                                                                                                                voids an out-of-state venue provision in a franchise
best justified as crucial to brand protection.       4 Carlson, supra note 3, at 369 (The common law test
                                                                                                                agreement. See BUS. & PROF. CODE §20040.5.
• Refrain from requiring franchisees to adopt       is inherently imprecise.).
                                                    5 S. G. Borello & Sons, Inc. v. Department of Indus.
                                                                                                                26 See, e.g., CORP. CODE §31512.

particular employment policies.                                                                                 27 Joint and several liability exists for violations of
                                                    Relations, 48 Cal. 3d 341, 352 n.6 (1989).
• Take no part in the hiring and firing deci-        6 Several California agencies are involved in classifi-
                                                                                                                California’s Franchise Investment Law (CORP. CODE
sions of franchisees.                                                                                           §31302) but not the Franchise Relations Act.
                                                    cation decisions: the Employment Development                28 The California Department of Corporations admin-
• Require each franchisee to operate its busi-      Department, the Division of Labor Standards
                                                                                                                isters the Franchise Investment Law and identifies these
ness through a business entity, not as a sole       Enforcement, and, to a lesser extent, the Franchise
                                                                                                                factors as indicia of a “marketing plan.” See California
proprietor.                                         Tax Board, the Division of Workers’ Compensation,
                                                                                                                Department of Corporations, Release 3-F, When Does
                                                    the Department of Industrial Relations, and the
• Require franchisees to purchase uniforms          Contractors State Licensing Board. Each has its own reg-
                                                                                                                an Agreement Constitute a “Franchise”? (rev. June
from designated third parties and use their                                                                     22, 1994), http://www.corp.ca.gov/Commissioner
                                                    ulations concerning independent contractors. See
own tools and vehicles on the job.                                                                              /Releases/3-F.asp (last visited Dec. 15, 2010) [here-
                                                    http://www.dir.ca.gov/dlse/faq_independentcontractor
                                                                                                                inafter Release 3-F].
• Emphasize their separate identity in com-         .htm (last visited Dec. 15, 2010) (“[S]ince different       29 See Thueson v. U-Haul Int’l, Inc., 144 Cal. App. 4th
munications with existing and prospective           laws may be involved in a particular situation…it is pos-
                                                                                                                664, 676 (2006).
franchisees, lenders, suppliers, the trade press,   sible that the same individual may be considered an         30 CORP. CODE §31011; Release 3-F, supra note 28.
                                                    employee for purposes of one law and an independent         31 Estrada v. FedEx Ground Package Sys., Inc., 154 Cal.
public filings, landlords, and others. A fran-
                                                    contractor under another law.”).
chisor should emphasize, with concrete exam-                                                                    App. 4th 1 (2007). In a separate action in federal
                                                    7 J. Tom, Is a Newscarrier an Employee or an
                                                                                                                court, approximately 27,000 FedEx drivers in 2005
ples, that despite sharing a common brand           Independent Contractor? Deterring Abuse of the
                                                                                                                consolidated 42 different misclassification class actions
name with franchisees, it operates a very dif-      “Independent Contractor” Label via State Tort Claims,
                                                                                                                against FedEx in a single multidistrict lawsuit in Indiana.
ferent business.                                    19 YALE L. & POL’Y REV. 489, 491 (2001).
                                                                                                                On December 13, 2010, the Indiana federal district
                                                    8 J. Moran, Independent Contractor or Employee?
• Require each franchisee to notify its own         Misclassification of Workers and Its Effect on the
                                                                                                                court, distinguishing Estrada, ruled for FedEx on a


                                                                                                                                       Los Angeles Lawyer March 2011 23
                                                                                             majority of the claims. The court found that FedEx
                                                                                             drivers were independent contractors in a majority of
                                                                                             states. The litigation is far from over: drivers are expected
 “Industry Specialists For Over 23 Years”                                                    to appeal the ruling, and a number of claims have been

 A  t Witkin & Eisinger we specialize in the Non-Judicial
      Foreclosure of obligations secured by real property
 or real and personal property (mixed collateral).
                                                                                             remanded for further factual development. http://www
                                                                                             .workplaceclassaction.com/class-action/fed-ex-triumphs
                                                                                             -in-jpmdl-class-actions-as-to-independent-contractor
 When your client needs a foreclosure done profession-                                       -classification-issues (last visited Jan. 17, 2011). Mean-
 ally and at the lowest possible cost, please call us at:                                    while, several state attorneys general are suing or have
                                                                                             recently settled misclassification cases against FedEx.
                                                                                             http://www.natlawreview.com/article/new-york-joins
                                                                                             -other-states-suing-fedex-misclassification-its-ground
                                                                                             -division-drivers-indepe (last visited Dec. 17, 2010).
                                                                                             32 http://www.dir.ca.gov/dlse/MisclassificationOfWorkers

                                                                                             .htm (last visited Dec. 17, 2010).
                                                                                             33 Narayan v. EGL, Inc., 616 F. 3d 895, 900 (9th Cir.

                                                                                             2010).
                                                                                             34 Id. at 903. At-will termination provisions are also

                                                                                             characteristic of many independent contractor arrange-
                                                                                             ments.

  WANT RESULTS?
                                                                                             35 Id. at 904.
                                                                                             36 By contrast, hiring companies in nonfranchise dis-

                                                                                             tribution arrangements frequently thrust independent
  COLLECTION OF JUDGMENTS AND DEBTS                                                          contactor status on workers without explaining the
                                                                                             implications. See http://www.labornotes.org/2010/03
 Specializing in statewide pre- and post-                                                    /when%E2%80%99s-worker-contractor-when-boss
 judgment collection litigation: lawsuits,                                                   -wants-cheat (last visited Dec. 15, 2010).
 arbitrations, writs, liens, levies, examinations,                                           37 Awuah v. Coverall N. Am., Inc., 707 F. Supp. 2d 80

 garnishments, attachments, asset searches and                                               (D. Mass 2010).
                                                                                             38 Id. at 84-85 (citing MASS. GEN LAWS ch. 149, §148B).
 seizures. Contingent fees available.
                                                                                             39 The Massachusetts ABC test presumes a worker is

    Law Offices of Matthew C. Mickelson                                                      an employee unless the putative employer can show the
           www.mickelsonlegal.com                                                            worker: A) is free from control and direction in per-
    mattmickelson@bizla.rr.com • 818.382.3360                                                forming services, B) performs services outside the usual
                                                                                             course of the employer’s business or outside of the
 —Taking On the Hard Cases Others Refuse—                                                    employer’s place of business, and C) is customarily
                                                                                             engaged in an independently established trade, occu-
                                                                                             pation, profession, or business of the same nature as
                                                                                             that involved in the services performed. The Awuah
                                                                                             court held that Coverall’s inability to prove that fran-
                                                                                             chisees performed services that were “independent,

       MOHAJERIAN INC                                                                        separate and distinct” from Coverall’s business meant
                                                                                             the franchisees were Coverall’s employees.
                                                                                             40 Coverall N. Am., Inc. v. Commissioner of the Div.
       A Professional Law Corporation                                                        of Unemployment Assistance, 447 Mass. 852 (2006).
       A FRANCHISE/IP FIRM                                                                   41 Pius Awuah v. Coverall N. Am., Inc., 2010 U.S.

                                                                                             Dist. LEXIS 101876 (D. Mass. 2010) (separate chal-
                                                                                             lenge to Awuah damages decision).
       Located in the Twin Towers building in the heart of Century City, Los Angeles,        42 Rochelle Spandorf, Structuring Franchises to Avoid
       the firm offers professional, high-quality legal solutions for corporate clients and   the Inadvertent License, LANDSLIDE, Mar./Apr. 2010,
       high net worth individuals nationwide involved in franchise/IP/business               http://www.abanet.org/intelprop/landslide.
                                                                                             43 Employee misclassification class actions increased by
       litigation. The firm assist clients with their franchise registration needs and FTC
                                                                                             50% in 2010 over 2009 filings. See http://www
       compliance issues.                                                                    .usatoday.com/money/economy/employment/2010-12
                                                                                             -13-contractjobs13_ST_N.htm (last visited Dec. 17,
       COMMITTED TO EXCELLENCE                                                               2010).
       With more than 45 years of combined legal experience, our lawyers provide the         44 Five leading janitorial franchisors are currently

       direct and efficient service our clients need when dealing with complex               defending franchisee misclassification class actions,
                                                                                             including two in California. http://www.sturdevantlaw
       business matters. We focus on delivering creative yet practical solutions that
                                                                                             .com/Cases.php?Case=34 (last visited Dec. 17, 2010).
       properly address their concerns. With an emphasis on one-on-one interaction,          See also note 31, supra.
       we work with clients to pursue the resolutions that best fit their objectives.         45 See Carlson, supra note 3, at 353 (“In most cases in

                                                                                             which independent contractor or employee status is
       Our founding and principal attorney, Al Mohajerian, is a certified legal specialist    questioned, the workers in question have no employ-
                                                                                             ees of their own.”). Some companies finance their
       in franchise and distribution law by the State Bar of California Board of Legal
                                                                                             operators’ initial costs or own the building, fleet, or
       Specialization. He was also selected for inclusion in the 2009, 2010 and 2011         equipment that the operators need to perform their jobs.
       California Super Lawyers lists, among other accomplishments. A well-known             The companies may pay their operators a commis-
       litigator with a reputation for confident, aggressive representation, he maintains     sion net of specific deductions to recoup their setup and
                                                                                             carrying costs, which they would otherwise have to
       a practice devoted to excellence in legal service.
                                                                                             absorb with an employee workforce. Commission
                                                                                             deductions do not constitute a required payment under
                                                                                             California’s franchise laws. See Thueson v. U-Haul
         310.556.3800                                       www.mohajerian.com               Int’l, Inc., 144 Cal. App. 4th 664, 676 (2006), and
                                                                                             Adees Corp. v. Avis Rent a Car Sys., 157 Fed. Appx.
                                                                                             2 (9th Cir. 2005) (unpublished).


24 Los Angeles Lawyer March 2011

				
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