Friday, November 6, 2015

Franchisor is not Employer of Franchisee's worker

The existence of an Employer-Employee relationship is an essential element of the burden of proof for a workers' compensation claim of the injured worker.

Appellate court decisions have identified the existence of the right to control the manner in which the work is performed as a key indicator of an employment relationship.

The control test is utilized the analyze the elements of the existence of an employment relationship in cases involving issues of: status as an employee; independent contractor status; casual employee; statutory employer and borrowed employee.

At times, an argument can be made that more than one business entity has some element of control in relation to a worker ... in these circumstances, Who is the employer responsible for workers' compensation benefit payment?

A recent case raised the question -  Can a Franchiser be an employer?
Answer:  Yes.

Question: Can a Franchiser be the "employer " of a worker with uninsured Franchisee?
Answer   ... Maybe; Maybe not.

Saladworks, LLC v. WCAB (Gaudioso and UEGF), No. 1789 CD 2014, is a reported decision of a panel of the Commonwealth Court of Pennsylvania authored by Judge McGinley on October 6, 2015. This decision assessed this employment relationship question and discussed the impact of the franchisee status as an uninsured entity and the statutory employer implications for the franchisor.

Factual and Procedural Background

Gaudioso worked at a Saladworks restaurant and performed various tasks, such as: placing food orders; kitchen prep work; making salads; working the cash resister. While disposing boxes he slipped and twisted both knees. He filed a claim petition against Saladworks as his employer. He requested penalties as Employer did not accept or deny his claim, a violation of Section 406.1 of the Act. 77 P.S. 717.1.

Subsequently, Claimant Gaudioso filed a separate claim petition against the Uninsured Employers Guaranty Fund (UEGF) as his direct employer did not have workers' compensation insurance.

The direct employer name was amended/corrected to reflect it was actually a franchisee of Saladworks. The franchisee was known as G21, LLC d/b/a Saladworks (G21).
We will call the direct employer the G21 store.

UEGF counsel filed a petition for joinder of Saladworks, the franchisor and alleged there was joint and several liability for the possible claimant work comp benefits. Saladworks moved to dismiss /strike this joinder, alleging it had no employer relationship with claimant, rather it was a franchiser which granted certain rights to the G21 store to use registered trademarks and its system, pursuant to a franchise agreement.

Saladworks WCJ Hearing Testimony 

The director of franchise administration for Saladworks appeared and testified before the WCJ. Roseann Maille testified Saladworks is a franchisor and they sell franchises to prospective franchisees to open their business with the Saladworks concept.
Under the Franchise Agreement, Saladworks does not
  • own or occupy the location,
  •  know the identity of employees at franchised locations,
  • do the hiring or firing of employees at franchise locations,
  • dictate employee work hours,
  • provide any training for the day to day operational employees of a franchise.
Saladworks does:
  • provide training to the owner of the franchise,
  • provide assistance with franchisee marketing,
  • assist franchisee prior to the opening of the location,
  • conducts operational performance reviews of franchisees
  • provides a confidential business manual which instructs the franchisee how to run the business,
  • establish policies for the layout and look of individual locations,
  • retains authority to terminate a franchise if a requested store remodel is not performed,
  • retain proprietary items and trademarks,
  • reviews and approves franchisee proposed advertising,
  • requires a certain amount of advertising per year,
  • requires the franchisee to maintain certain types of insurance, including Workers' Compensation insurance. 
WCJ Claim Petition Decision
  1. Employer, G21 store did not timely file an answer to the claim petition. Accordingly, all well-pled allegations of the Claim petition are deemed admitted and Employer is prevented from presenting any evidence to challenge the allegations in the petition or presenting any affirmative defenses. Citing: Yellow Freight, Inc. v. WCAB (Madara) (Pa. Cmwlth. 1981).
  2. Saladworks witness was credible. Saladworks does not have any control over the franchisee's employees. Franchisee, G21 store controls the employees. 
  3. The WCJ granted the motion to strike the joinder motion filed by UEGF. Saladworks was dismissed from this litigation. 

UEGF argued the WCJ erred as she did not consider Saladworks to be the "statutory employer" of the claimant, as he was the employee of an uninsured business.

WCAB agreed. WCJ was Reversed.
WCAB reasoned, cases involving franchisors and franchisees must be analyzed in a case-by-case basis. Saladworks fits the definition of a statutory employer under Section 302(a).
Section 302(a) applies to the class of statutory employers, which are not in control of the business premises and use subcontractors for services that are in a "regular or recurrent" part of the business.

Section 302(b)  does not apply here,as Saladworks did not own or occupy the premises where claimant was injured.
The Section 306(b) test to determine if there is a statutory employer, sets forth 5 factors: (1) the entity is under contract with an owner or one who is in a position of an owner; (2) the entity occupies or controls the premises where the injury took place; (3) the entity entered into a subcontract; (4) the entity entrusted a portion of its regular business to the subcontractor; (5) the injured party was employed by the subcontractor. See: McDonald v. Levinson Steel Company, 153 A. 424 (Pa. 1930). 

WCAB reasoned that Saladworks contracted with G21 store to have work performed which is a regular and recurrent part of the Saladworks' business. The purpose of the statutory employer doctrine is to place responsibility for benefit payment on the first business in the contract chain, when an injured workers direct employer, the subcontractor, fails to secure work comp insurance.

Saladworks Commonwealth Court Appeal

Saladworks argued:
  •  the WCAB erred when they reversed the WCJ dismissal of the joinder.
  • Section 302 (a) does not apply to franchisor/franchisee agreements.
  • the WCAB misunderstood the nature of the business of Saladworks.
  • Saladworks is not involved in the day-to-day operations of the franchisee location.
  • Saladworks is in the business of selling franchises to franchisees who open their own businesses using the Saladworks concept. 
The franchisor-franchisee relationship is different from a traditional contractor-subcontractor relationship. A traditional contractor hires a subcontractor to perform a specific task that aids the overall goal of the contractor. For example, a contractor erecting a new building may hire an electrician as a subcontractor to install wiring in the building.

In contrast, the goal of the franchisor Saladworks is to sell more franchises, so it may reap fees and royalties. The goal of Saladworks is not trying to sell more salads itself.

Section 302(a) provides that an entity must contract to have work performed that is a regular or recurrent part of its business, in order to be considered a statutory employer.

Commonwealth Court reversed the WCAB. 
The WCJ dismissal of joinder of Saladworks  is affirmed.
Saladworks is in the business of selling franchises to franchisees.

While Saladworks and G21 store are connected through the Franchise Agreement, the appellate court would not adopt the reasoning of the WCAB. Saladworks did not contract with G21 store to perform work which was a regular and recurrent part of the Saladworks franchisor business.

While Saladworks provides certain services to independent franchisees like G21 store,
Saladworks is not in the business of actually making and selling salads.

Claimant was injured while working in the employ of a franchisee who was in the business of selling salads. Claimant was not an employee of Saladworks. G21 store was the employer of claimant at the time of his work injury. G21 is liable for work comp benefit payments. As G21 store lacked work comp insurance, the UEGF was responsible for benefit payments pursuant to Section 1602(c) of the Act, 77 P.S. 2702(c).

Practice Pointers:

1. This case is a good example of the complexity that arises when one must interpret and determine the application of two different sections of the Workers Compensation Act. As noted by the Commonwealth Court, the question of statutory employer typically arises in the context of construction work. However, if one is unfamiliar with the application/interpretation of the statutory employer provisions, your assessment of the case may be wrong. It behooves the Employer and Insurer to obtain an experienced legal opinion at the outset of litigation.

2. When one reviews the facts presented and analysis employed by the Court, it seems that a situation could arise where the facts may implicate the Franchisor as an Employer of the injured worker. For example, in the early stage of store set-up and training, the Franchisor may direct the workers in performing tasks the proper "Saladworks way". Thus training of the franchisee may extend to the workers. Again, it is essential to conduct an early review and identification of all of the pertinent facts, policies and procedures. 

3. The Franchise Agreement required the franchisee to have workers compensation insurance. Someone missed this item on their checklist. Franchisors must be diligent to assure their franchisees comply with their basis legal obligations, before they open their doors for business. 

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