Employment Law Daily Whether Jani-King franchise agreement, manual show franchisees are employees to be resolved on class-wide basis
Friday, September 23, 2016

Whether Jani-King franchise agreement, manual show franchisees are employees to be resolved on class-wide basis

By Lorene D. Park, J.D. Affirming Rule 23 class certification in a dispute over whether Jani-King franchisees should have been classified as "employees" rather than independent contractors under Pennsylvania wage and hour law, the Third Circuit found that Rule 23’s commonality and predominance requirements were met because the misclassification dispute could be resolved by common evidence, including the franchise agreement, Jani-King manuals, and representative testimony (Williams v. Jani-King of Philadelphia, Inc., September 21, 2016, Fisher, D.). Jani-King provides janitorial and other cleaning services to restaurants, warehouses, and other commercial properties. It licenses its trademarks, goodwill, and cleaning system to franchisees who it classifies as independent contractors. Two Jani-King franchisees challenged the classification and filed suit on behalf of a class of franchisees in the Philadelphia area, claiming they were really "employees" and seeking unpaid wages under the Pennsylvania Wage Payment and Collection Law (WPCL). Franchise requirements. To obtain a franchise, individuals must pass a background check, pay an initial fee of between $14,625 and $142,750, and sign the franchise agreement. Franchisees must also meet several of Jani-King’s requirements, including: attend a 13-day training and pass a test about safety and the training manual (which is over 450 pages long); purchase cleaning equipment and insurance, both offered by Jani-King; and secure any licenses or permits. Jani-King guarantees new franchisees a certain dollar amount in cleaning contracts, the size of which depends on the initial investment. Jani-King obtains customers and enters contracts with them; franchisees are not party to customer contracts, though they can reject assignments that are offered. In addition, Jani-King policy manuals dictate how often franchisees communicate with customers, how they dress, and more. Customers pay Jani-King, which then pays the franchisees, after certain fees are deducted (e.g., royalty fee, accounting fee, advertising fee). Franchisees had a wide range of business sizes; some had as many as 27 employees and others had none. Appeal of class certification. In this suit, the district court granted Rule 23 class certification to the plaintiffs and Jani-King appealed. The Third Circuit noted that Jani-King did not dispute numerosity and did not challenge the lower court’s explanation as to why typicality, adequacy, and superiority were established. The issue on appeal was therefore whether the claims were capable of class-wide resolution. This included a consideration of Rule 23(a)(2)’s commonality requirement, which focuses on whether there are common issues of law and fact, and Rule 23(b)(3)’s requirement that common issues predominate over class members’ individual issues. The main dispute—employee status. The WPCL requires employers, among other things, to pay to employees wages and agreed-upon benefits, by lawful means, making only lawful deductions from pay. The main dispute here was whether the plaintiffs were "employees" under the WPCL, which does not define that term. Relying on similar statutes, Pennsylvania courts apply a multi-factor test to determine if someone is an employee or an independent contractor, including: control over the manner in which work is done; terms of any agreement; the nature of the work; the skill required; who supplies the tools; whether payment is by the job; and the right to terminate at any time. No factor is dispositive, but the right to control is "paramount." Franchise agreement, manuals (common evidence) can answer question. In the Third Circuit’s view, the plaintiffs’ claims could be proven through common evidence, including the Jani-King franchise agreement, policies manual, training manual, and representative testimony about those documents. The franchise agreement and manuals placed controls on the franchisees including: how often they communicate with customers, how to address complaints, where to solicit business, what to wear, what records to keep, how to advertise, how far in advance to inform the franchisor of vacations, and how quickly the franchisee must be able to be reached. Jani-King also controls the franchisees’ assignments, has the right to inspect their work, and can change the policies and procedures as it sees fit. The documents also addressed the nature of the work, the skill required, tools, whether payment is by the job, and the right to terminate. Certification affirmed. Significantly, the franchise agreement and manuals apply to franchisees who have dozens of employees, and to those with none. Based on the foregoing, the appeals court agreed with the lower court that the commonality requirement was met and that common questions predominated over individual questions. Class certification was therefore affirmed. The appeals court rejected Jani-King’s assertion that franchise system controls are somehow categorically excluded from consideration in the employee-independent contractor analysis. Under Pennsylvania law, no special treatment is afforded the franchise relationship. While Jani-King might ultimately be correct that the franchise agreement and manuals did not contain sufficient controls over the day-to-day work of franchisees to make them "employees" under state law, either way, it was possible to make that determination on a class-wide basis. Dissent. Judge Cowen dissented, concluding that the purported common evidence merely set forth various franchise system controls and predicting that the Pennsylvania Supreme Court would hold that "controls necessary to protect a franchisor’s trademark, trade name, and goodwill—in short, "franchise system controls"—are insufficient by themselves to establish the existence of an employer-employee relationship between the franchisor and its franchisees." Judge Cowen would vacate the class certification and remand for further proceedings on an individual basis.

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