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Franchisor as Joint Employer? Not So Fast....

One of the mainstays of franchising has been that a franchisee is an independent contractor, rather than an employee of the franchisor. In fact, a mantra of franchise organizations has been that a franchisee is in business for himself or herself, but not by himself or herself. Though a franchisor can provide a name, product and system of operating, the franchisee still controls the day-to-day operation of the business. To a great extent, this bulwark of franchising has shielded the franchisor from liability resulting from the negligent or wrongful acts of the franchisee, as well as claims made by creditors and disaffected employees of the franchisee.

For the past decade, however, that point of view has been under attack. Whether it is a franchisee claiming that the franchisor so dominates the franchisee's business that the franchisee should receive employee benefits, a customer of a fast food restaurant looking for a "deep pocket" to pay for injuries sustained while at the restaurant, or state and local governments looking for additional revenue from workers compensation and wage taxes, franchisors have increasingly been held to be liable to claimants and the state itself for franchisee debts and obligations.

One of the avenues which employees and the states have used to blur the distinction between franchisees and franchisors is to claim that a franchisor is a "joint employer" of a franchisee's employees. For example, when Seattle passed an ordinance to raise the minimum wage of employees, many franchisees claimed to be exempt from the ordinance, because they had so few employees. In response, the city stated that franchisors such as Starbucks are "joint employers" of the franchisees' employees. The concept has gained traction throughout the United States.

What about Pennsylvania? In October of 2015, the Commonwealth Court ruled that a franchisor would not be deemed a joint employer of an employee of a Saladworks franchisee, at least in regard to being liable for workers' compensation payments. However, in May, 2016, the Pennsylvania Supreme Court granted an appeal of the case, and many franchise observers felt that this signaled that the entire underpinning of franchising was now in jeopardy.

They were wrong: In mid-December of 2016, the PA Supreme Court issued an order which stated that the appeal had been "improvidently granted," and allowed the Commonwealth's Court ruling to stand. The opinion of the Commonwealth Court included several phrases of comfort to franchisors, such as the following:

--"While Saladworks provides certain services to independent franchisees, it is not in the restaurant business or the business of selling salads."

--"Saladworks was in the business of selling franchises that used its unique system."

--The work performed by the franchisee was not a "regular or recurrent part" of Saladworks' business.

By rejecting the claim that the franchisor is a joint employer of the franchisee (at least as far as liability for workers' compensation claims), Pennsylvania has--at least for now--stemmed the tide of joint employer claims sanctioned by the Commonwealth. Of course, this is but one type of franchisor-as-employer claim. All sorts of other claims are pending, and it will be several years before we will know if this case signaled a reversal of the trend toward franchisor-as-employer liability, or simply a respite from the rising tide of franchisor-as-employer liability.

-----Ken Milner