In a recent sharply divided 2-1 decision, the Third Circuit Court of Appeals affirmed the grant of class certification against commercial cleaning franchisor Jani-King in a lawsuit alleging that Jani-King’s franchisees were misclassified as independent contractors. (Williams v. Jani-King of Philadelphia Inc., No. 15-2049, 2016 WL 5111920 (3d Cir. Sept. 21, 2016), available here).

The blistering dissent strongly disagreed, stating, “Franchising constitutes a bedrock of the American economy” and “the majority's opinion threatens the viability of this basic economic bedrock.” The dissent worried that the majority’s opinion would lead to additional class action litigation against other franchisors and would be cited to support the proposition that franchise system controls may by themselves give rise to an employer-employee relationship.

The underlying claims were by franchisees seeking unpaid wages as the franchisor’s “employees” under the Pennsylvania Wage Payment and Collection Law (WPCL). To determine whether class certification was appropriate, the majority predicted the Pennsylvania Supreme Court would apply a multifactor test with the following factors to distinguish between employees and independent contractors for the WPCL:

  • the control of the manner in which work is to be done
  • responsibility for the result only
  • terms of agreement between the parties
  • the nature of the work or occupation
  • skill required for performance
  • whether the one who is employed is engaged in a distinct occupation or business
  • which party supplies the tools
  • whether payment is by time or by the job
  • whether the work is part of the employer’s regular business and
  • the right to terminate the employment at any time.

Under this test, the “paramount” factor was the right to control the manner in which the work is accomplished. The right to control was more significant than actual control.

The majority next turned to the question of whether, using the multifactor test, the employment status question could be resolved through evidence common to the class. The Third Circuit held that documentary evidence alone could be sufficient to resolve the multifactor employment status test, and ruled that the franchisee classification issues were susceptible to class-wide determination through common evidence (the franchise agreement, policies manual, training manual, and testimony about those documents).

The plaintiffs pointed to specific provisions in the franchise agreement and manuals to show that Jani-King had the ability to control the manner in which franchisees perform their day-to-day tasks, through mandates regarding:

  • how often the franchisee must communicate with customers
  • how franchisees must address customer complaints
  • where franchisees can solicit business
  • what franchisees must wear
  • what types of records the franchisee must keep
  • how the franchisee can advertise
  • how far in advance franchisees must inform the franchisor of vacations and
  • how quickly the franchisee must be able to be reached.

In addition, the franchise agreements addressed the franchisees’ work assignments, Jani-King’s right to inspect the franchisees’ work, and Jani-King’s ability to change the policies and procedures as it saw fit.

The majority refused to reach the merits of whether the controls in the franchise agreement and manuals made Jani-King the employer of its franchisees under Pennsylvania’s multifactor employment test. “Jani-King may ultimately be correct that the franchise agreement and manual do not contain sufficient controls over the day-to-day work of its franchisees to make them employees under Pennsylvania law, and we express no opinion on that matter here. Either way, it is possible to make the determination on a class-wide basis.”

The majority rejected Jani-King’s and the International Franchise Association’s argument that system controls inherent in franchising should be irrelevant when considering whether an alleged employer has the right to exercise day-to-day control. The Third Circuit stated, “Pennsylvania law does not distinguish between controls put in place to protect a franchise’s goodwill and intellectual property and controls for other purposes…Under Pennsylvania law, no special treatment is accorded to the franchise relationship. A franchisee may be an employee or an independent contractor depending on the nature of the franchise system controls.” The dissent strongly disagreed with the majority, stating, “Pennsylvania’s highest court would not allow the very thing that defines [franchising] – the uniformity of product and control of its quality and distribution to be used to put at risk this critical and generally beneficial sector of our economy.” The dissent advocated for a test that considered whether the controls at issue exceeded what was necessary to protect a franchisor’s trademark, trade name, or good will. Under this test, the dissent would have found that there was very little – if any – common evidence tending to prove an employer-employee relationship between Jani-King and its franchisees.

On October 5, 2016, Jani-King petitioned for rehearing or rehearing en banc. The Third Circuit has not yet ruled on that petition. On October 12, 2016, the International Franchise Association sought leave to file an amicus brief in support of Jani-King’s rehearing petition, emphasizing that the opinion threatened the viability of and foundation of franchising. (DLA Piper represented the IFA on this amicus rehearing brief.) Regardless of the outcome of Jani-King’s petition, this latest Third Circuit decision confirms the oft-repeated advice that franchisors should eliminate any unnecessary controls from their franchise agreements and manuals.