Recent Decisions Are Eroding the Economic Bedrock of the Economy

According to U.S. Court of Appeals for the Third Circuit decisions, franchising is an economic ­”bedrock of the American economy,” and recent class action labor law decisions are eroding that bedrock. This is an opinion shared by many franchise professionals and a growing number of jurists. The ­dissenting opinion of Third Circuit Judge Robert E. Cowen in Williams v. Jani-King of Philadelphia, Inc. (3d. Cir. 2016), argues the essential question in these labor cases is “whether ‘franchise-system controls” make a franchisor the employer of its franchisees … .” Cowen criticizes the court using “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 issue in Jani-King is whether those people who signed franchise agreements and were given franchise disclosure documents after making an investment in their own business are properly classified as employees or independent contractors. The courts generally look at the controls ­imposed by the franchisor, and if the controls are too rigid, then some courts conclude that the controls similar to that of employment and conclude the franchisor is an employer. With that conclusion, franchisors are then liable for withholding taxes, unemployment, workmen’s compensation obligations, among other obligations of an employer. Although the circuit court did not address the merits of the case, only class certification, the concept that trademark and brand controls suddenly can result in morphing a business investment into an employment relationship is entirely contrary to the purpose of the FTC rule governing disclosures in connection with the offer and sale of franchises.