Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Wash. App.: Franchisor liable for workers comp premiums for franchisees without employees, (Feb 4, 2015)

By Linda O’Brien, J.D., LL.M.

Franchisees of a janitorial services franchisor that did not have employees were workers subject to the industrial insurance statute, making the franchisor liable to pay workers compensation premiums for those individuals, a Washington appellate court has ruled. However, franchisees that had employees were not covered workers subject to the statute (Department of Labor and Industries of the State of Washington v. Lyons Enterprises, Inc., February 3, 2015, Johanson, J.).

Lyons Enterprises is a distributor of Jan-Pro cleaning franchises. Under its franchise agreement, a franchisee pays franchise, royalty, and management fees for the right to participate in the Jan-Pro system. Franchisees are permitted to use Jan-Pro brand and trademarks in business and are instructed in Jan-Pro’s proprietary cleaning procedure. Lyons solicits clients, enters into cleaning contracts, and bills clients on behalf of its franchisees. All franchisees are organized as independent businesses, paying for their own business licenses, insurance, and industrial insurance (workers compensation) premiums for their own employees if they had any.

In 2010, the Washington Department of Labor and Industries (L&I) audited Lyons to determine if its franchisees were subject to the Industrial Insurance Act (IIA). The audit found that 18 Jan-Pro franchises were not covered workers — therefore not subject to IIA premiums — because they employed workers of their own. However, the remaining franchisees were covered workers and were not exempt from the IIA. L&I reached the conclusion because those franchisees were not “free from direction and control” of the franchisor. Lyons appealed to the Board of Industrial Insurance Appeals, which issued a decision adopting the position of the 2010 audit. Both Lyons and L&I appealed the Board’s decision to the Superior Court, which held that all of Lyon’s franchisees were covered workers. Lyons then appealed the Superior Court order.

The appellate court determined that Lyons franchisees without employees were workers covered by the IIA, while those franchisees that have employees did not come within the purview of the IIA. The IIA requires employers to report and pay workers compensation premiums for all of their workers. Lyon’s argument that its relationship with its franchisees was not one of employer and worker, but was a bilateral contract between two independent businesses, was partially correct, in the court’s view.

The court first looked to the IIA which defines a worker as “every person in the state who is engaged in the employment of . . . or who is working under an independent contract, the essence of which is his or her personal labor for an employer.” To determine whether Lyon’s franchisees performed personal labor, the court, guided by the Washington Supreme Court decision White v. Department of Labor & Industries, 294 P.2d 650 (1956), determined that a contractor was excluded as a covered worker if he or she actually employs others and not if he or she may at some point employ others.

In this case, Lyon’s franchisees were free to hire subordinates, and approximately 80 percent of the franchisees have employees to assist with servicing the cleaning contracts. The Board did not err in finding that those franchises were not workers. Accordingly, the appellate court reversed the Superior Court and reinstated the Board’s decision only as to franchisees that had subordinates.

However, the court found that the remaining franchisees were not free from control or direction over the performance of the service and were not customarily engaged in an independent business as to satisfy the exception to “worker” for IIA purposes. The Lyons franchisees’ businesses were not created separate and apart from their franchise agreement with Lyons and had to terminate their cleaning businesses when they ceased to be a Lyons franchisee. As the Board determined, franchisees that lacked subordinates were covered workers under the IIA and Lyons must pay IIA premiums for those workers, the court concluded.

Finally, there was conflicting evidence on how many Lyons franchisees employed subordinates. The Board’s decision that only 18 franchisees had subordinates was not supported by substantial evidence. Thus, the case was remanded to the Board for a factual determination of which franchisees employed subordinates.

The case is No. 45033-0-II.

Attorneys: Steve Vinyard, Attorney General's Office, for Department of Labor and Industries of the State of Washington. Ryan P. McBride (Lane Powell PC) for Lyons Enterprises, Inc.

Companies: Lyons Enterprises, Inc.

Cases: FranchisingDistribution WashingtonNews