The Franchisor-Franchisee Worker Classification Enigma | Bressler, Amery & Ross, CP

0


A recent Second Circuit ruling dismisses claims by franchisees that franchisor deductions from income violate state minimum wage laws and anti-kickback laws, but leaves the door open for franchisor-franchisee relationships to be classified. as franchisor-employee relationship.

The United States Court of Appeals for the Second Circuit recently ruled that a franchisor did not violate the minimum wage law or the Connecticut anti-recoil law by deducting fees from the income of its franchisees, even whether franchisees should have been classified as employees. Mujo v. Jani-King International Inc., __ F.4e __ (2sd Cir. 2021). The Plenary Court last week rejected franchisees’ request for a new hearing or a new hearing in bench.

Jani-King is a cleaning services franchisor. As part of its system, it assigns customers to franchisees who, in turn, are free to accept, decline or exchange those customers with other franchisees. Customers pay Jani-King directly. It then collects fees, including royalties and advertising costs, before paying the balance to franchisees.

The franchisees sued Jani-King for violating minimum wage laws and for unjust enrichment. They claimed that Jani-King wrongly classified them as independent contractors rather than employees. They argued that Jani-King’s deductions from client income violated state law prohibiting such deductions and prohibiting employers from charging fees to employees as a condition of employment.

The twosd Circuit upheld the district court’s dismissal of all claims against Jani-King. The Court concluded that, “even assuming that the [franchisees] are employees who receive a salary subject to… the Act, their salary under the franchise agreement is the remaining fund after Jani-King deducts her fees under the franchise agreement. The Court also upheld the dismissal of the unjust enrichment claim, explaining that while the appellants were employees, they can also be franchisees. As franchisees, they received value under a franchise agreement in exchange for the franchisee fees deducted. The court emphasized the public order of freedom of contract – even though the contract may reflect “recklessly concluded deals”.

The twosd Circuit noted that the position of franchisees would effectively ban certain types of franchise businesses by making them economically unviable, thereby violating the state’s “comprehensive franchise regulatory regime”. Incredibly, franchisors could be prevented from collecting most, if not all, franchise fees in any franchise relationship where they first collect revenue from customers before paying franchisees.

Mujo v. Jani-King Int’l, Inc. offers advice on the proper structuring of a franchise, while avoiding the ultimate question of whether a franchise agreement has created a working relationship. When dealing with the classification of employees, franchisees should consider many factors, including the controls exercised by the franchisor, the organization of franchise systems and franchise fees. They must then properly structure, memorize and implement the franchise relationship to ensure compliance with applicable franchise and employment laws at state and federal levels.


Share.

About Author

Comments are closed.