Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Pa.Cmmw.: Franchisor lacked contractor-subcontractor relationship for purposes of being jointly and severally liable for injury payments to franchisee employee, (Oct 8, 2015)

By Michael Menzhuber, J.D., LL.M.

An order by the state Workers’ Compensation Appeal Board that a franchisor was jointly and severally liable for the payment of benefits to a franchisee’s employee who was injured on the job was reversed by the Commonwealth Court of Pennsylvania in Philadelphia. In reversing the Board’s decision, the court determined that the franchisor and the franchisee did not have a contractor-subcontractor relationship, for purposes of creating joint and several liability (Saladworks, LLC v. Workers’ Compensation Appeal Board, October 6, 2015, McGinley, B.).

Background. Saladworks, LLC (Saladworks) sold franchises that used a unique system for selling salads and other foods. G21 was an independent franchisee of Saladworks that operated a Saladworks restaurant in Philadelphia, Pennsylvania. Frank Gaudios (claimant), an employee at G21’s Saladworks restaurant, incurred an on-the-job injury. Because G21 did not have insurance, the claimant filed a benefits claim petition against Pennsylvania’s Uninsured Employers Guaranty Fund (UEGF). UEGF, in turn, filed a joinder petition against Saladworks that alleged that Saladworks was an additional employer, agent, statutory employer of the claimant and was, therefore, jointly and severally liable for benefit payments to the claimant. Saladworks moved to dismiss/strike the joinder petition on the basis that it had no relationship with the claimant but was a franchisor that had granted certain rights to G21 to use its registered trademarks and system pursuant to the franchise agreement.

Saladworks presented testimony at a hearing before the Workers’ Compensation Judge (WCJ), that Saladworks: (1) did not know the identity of employees at franchised locations; (2) did not do any of the hiring or firing of employees at franchised locations; (3) did not dictate how many hours an employee worked at a franchise location; and (4) did not provide any training for the day-to-day operational employees of a franchise. At the conclusion of this testimony, the WCJ granted Saladworks’ motion to strike the joinder petition because it did not see an at-will employment relationship and was not aware of any case that held that a franchisor was an employer.

The UEGF appealed the WCJ’s denial of its joinder claim and asserted that the WCJ erred when it determined that Saladworks was not a statutory employee of the claimant. The appeals board agreed and reversed the WCJ’s order. It determined that Saladworks was a statutory employer under the Workers’ Compensation Act (Act) because it contracted with G21, as the franchisee, to have work performed which was a regular or recurrent part of Saladworks’ business occupation or trade.

Workers’ Compensation Act. The Act provides that a contractor is liable for the payment of compensation to employees of the subcontractor. For purposes of the Act, a contractor is a party who contracts to have work performed of a kind which is a regular or recurrent part of the party’s business, occupation, profession or trade. Saladworks argued that the appeals board misunderstood the nature of its business which was to sell franchises to franchisees that open their own businesses using Saladworks’ concept; and Saladworks’ franchisor-franchisee relationship with G21 was different than that of a traditional contractor-subcontractor.

The court agreed with Saladworks that its franchisor-franchisee relationship with G21 was different from that of a traditional contractor-subcontractor for purposes of liability under the Act. Saladworks and G21 were connected through the franchise agreement and that, pursuant to that agreement, Saladworks provided certain assistance to G21 and had approval of G21’s advertising. However, the work performed by G21 under the franchise agreement was not a regular or recurrent part of Saladworks’ business, occupation, profession, or trade because: (1) Saladworks’ main business was the sale of franchises to franchisees that desired to use the Saladworks name, system, and marketing expertise; and (2) G21’s main business was to sell salads and other food products. The court further determined that the claimant was injured while working in furtherance of G21’s main business.

The court, therefore, concluded that: (1) the claimant was not an employee of Saladworks because no contractor-subcontractor relationship existed between Saladworks and G21; (2) that G21 was the claimant’s employer at the time of his injury; and (3) G21 was liable for the payment of benefits to the claimant. It further concluded that, because G21 lacked workers’ compensation insurance, the UEGF was responsible for the payment of the claimant’s benefits.

The case is 1789 C.D. 2014.

Attorneys: Max Robert Kimbrough (Del Collo & Mazzanti LLP) for Wesco Insurance Co. and Saladworks,LLC. Ronald Ashley Carter (Sand & Saidel P.C.) for Uninsured Employers Guarantee Fund.

Companies: Wesco Insurance Co.; Saladworks, LLC; Uninsured Employers Guarantee Fund

Cases: FranchisingDistribution PennsylvaniaNews