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When Will Franchisees Be Considered Employees? Still Undecided

By Mario Herman,Esq.

A number of recent court cases have involved claims by franchisees that they were de facto employees of the franchisor. The following court case is another example of how the question of the employer-employee relationship under a franchise contract continues to come up.

On February 16, 2012, the United States District Court, Northern District of California, granted the Plaintiff’s motion for certification and stayed the action pending resolution of the interlocutory appeal before the Ninth Circuit in the matter of Juarez v. Jani-King of California, Inc. 

Plaintiffs had purchased a cleaning service franchises from the defendant, Jani-King of California, Inc., Jani–King, Inc., and Jani–King International, Inc. (collectively, “Defendants”). The cleaning service franchises turned out to be unprofitable.  Plaintiffs sued the Defendants asserting, among other things, claims under the California Labor Code, alleging that they were misclassified as franchisees because Defendants exercised such control over them so as to create an employer-employee relationship.

On January 23, 2012, the District Court dismissed Plaintiffs' Labor Code claims when it granted in part and denied in part Defendants' motion for summary judgment. Relying on the California Court of Appeal's decision in Cislaw v. Southland Corporation, 4 Cal.App.4th 1284 (Cal.Ct.App.1992), the District Court held that “[a] franchisee must show that the franchisor exercised ‘control beyond that necessary to protect and maintain its interest in its trademark, trade name, and good will’ to establish a prima facie case of an employer-employee relationship.” Summary Judgment Decision at 8 (quoting Cislaw, 4 Cal.App.4th at 1296, 6 Cal.Rptr.2d 386). The Court rejected Plaintiffs' argument that it should apply the test enunciated by the Ninth Circuit in Narayan v. EGL, Inc., 616 F.3d 895, 900 (9th Cir.2010), reasoning the Narayan test was inapposite in the franchise context. Id. at 9 n. 2.

Plaintiffs moved the Court to certify for interlocutory appeal that portion of the Court's Summary Judgment Decision dismissing Plaintiffs' Labor Code claims and to stay further proceedings pending that appeal.  In granting the Plaintiff’s motion, the court found that “there is substantial ground for difference of opinion regarding the application of Cislaw to Plaintiffs' Labor Code claims.”  The Court noted that it had previously acknowledged in its order denying class certification, that the controlling authority on this issue “is not entirely clear.” The Court further noted that courts in other states have reached different conclusions as to what test should apply to employment classification claims brought in the franchise context. See Hayes v. Enmon Enters., LLC, 10–CV–00382–CWR–LRA, 2011 U.S. Dist. LEXIS 66736, 2011 WL 2491375 (S.D. Miss. June 22, 2011); Awuah v. Coverall N. Am. Inc., 707 F.Supp.2d 80 (D.Mass.2010); Coverall N. Am., Inc. v. Division of Unemployment Assistance, 447 Mass. 852, 857 N.E.2d 1083 (2006).  Additionally, the Court recognized that the Ninth Circuit very recently issued an opinion in Ruiz v. Affinity Logistics Corp, 667 F.3d 1318, 202 (9th Cir. Feb.8, 2012), which may have some bearing on this dispute.  In Ruiz the Ninth Circuit noted that the “California Supreme Court has developed a multi-factor test for determining employment status. S.G. Borello & Sons, Inc. v. Dep't of Indus. Rel., 48 Cal.3d 341, 256 Cal.Rptr. 543, 769 P.2d 399, 404–07 (1989). The California Supreme Court recognized that this test “must be applied with deference to the purposes of the protective legislation” that the worker seeks to enforce. Id., 256 Cal.Rptr. 543, 769 P.2d at 406 (emphasis added). “[T]he employee-independent contractor issue cannot be decided absent consideration of the remedial statutory purpose” behind the statute the worker seeks to enforce. Id., 256 Cal.Rptr. 543, 769 P.2d at 405.”

This will be case worth watching for both franchisees and franchisors.

Mr. Herman based in Washington, D.C., represents franchisees domestically and internationally negotiation, mediation, arbitration, and litigation.

202-686-2886 (ph)

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