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Employer-Employee Relationship for Unemployment Insurance Purposes
In some franchise arrangements, the franchisor contracts with the ultimate customer, but its franchisees provide the contracted-for services to that end-customer. Janitorial services franchises typically follow this pattern. A great fear of franchisors whose programs follow this pattern is having their franchisees found to be employees for unemployment insurance and other employment-related purposes. A recent decision by an Oregon intermediate appellate court will give those franchisors pause.
Employment Department v. National Maintenance Contractors of Oregon, Inc. (Oregon Court of Appeals, March 19, 2009) BFG 14,102, involved an appeal from a finding by an Administrative Law Judge (“ALJ”) that the defendant (“NMC”) was not an “employer” for purposes of Oregon's unemployment insurance statutes. Employers must, among other things, pay unemployment insurance taxes on “wages paid for services.” “Wages” is defined in the statutes as “all remuneration for employment.” “Employment” under the Oregon law means “service for an employer ' performed for remuneration or under any contract of hire, written or oral, express or implied.” There is an exclusion from this definition for independent contractors, as discussed below. Oregon courts have determined that the intent of the legislature was to give the Unemployment Compensation Act broad and liberal coverage.
NMC enters into agreements with building owners to provide janitorial services. It advises the building owners that the services will be performed by its franchisees. It assigns the responsibility of cleaning some or all of the concerned building to one or more of its franchisees. The building owner pays NMC, which then deducts its royalty, liability insurance premiums, and an office management fee. If a building owner does not pay, the franchisee is not paid by NMC. The franchisee purchases its own equipment and supplies from a list of franchisor-approved items, and must obtain approval of alternate supplies. The other terms of the franchise agreement are typical franchise terms, such as approval of alternate supplies, following the operating requirements of NMC, training requirements, franchisor approval of assignment by the franchisee, right of first refusal, conditions of default, and so forth.
After being assessed for unemployment insurance taxes by the Oregon Employment Development Department, NMC disputed the assessment and requested a hearing before an ALJ. The ALJ found that the franchisees' services were performed for NMC, but their remuneration was from the building owners. As such, no employer-employee relationship existed, and no unemployment insurance taxes were due. The Employment Department appealed.
The Oregon court agreed with the ALJ that the franchisees performed their services for NMC rather than for the building owners, since the franchise agreement terms were in the nature of a subcontract under which the franchisees discharged NMC's obligations to the building owners. The issue then became who paid the franchisee for the services. NMC contended that, although indirect, the payments came to the franchisees by the building owners. The court held, however, that the building owners were under no contractual obligation to pay the franchisees. The franchisee's compensation was NMC's obligation under the parties' franchise agreement. The franchisees did bear the risk of nonpayment by the building owners, the court held; and this made payment to the franchisees conditional upon receipt of payment by NMC, but that did not change the nature of the payments or who was obligated to make them.
NMC argued that since franchises are regulated under Oregon law, the Oregon legislature recognized that a franchise was a unique relationship separate and distinct from that of an employer and employee. The court, however, stated that the Oregon franchise law merely dealt with the granting of a franchise, not with the nature of the ongoing relationship between the parties. Even though the court recognized that a franchise relationship differs from a traditional employment relationship, the court held that a franchise agreement can still provide the elements that satisfy the definitional aspects of the Oregon unemployment insurance law.
NMC had argued before the ALJ that even if it were found that the franchisees provided services to NMC for remuneration under a broad interpretation of the unemployment insurance law, the franchise relationship fell under the exclusion for independent contractors. The ALJ did not reach that issue, since it found that the unemployment insurance law did not apply based on the remuneration issue. Since the court found that the decision of the ALJ was in error on the payment issue and that, absent an exclusion, the tax was valid, the question of whether the NMC franchisees were independent contractors under the law was sent back to the ALJ for determination. ORS 670.600 provides the definition of “independent contractor.” Among the factors that must be satisfied under that statute for such a finding is that the person providing the services “is free from the direction and control over the means and manner of providing the services '” ' something that may depend on the degree of direction provided in the franchise agreement or related manuals or other directives of the franchisor.
Also of interest to NMC, no doubt, is the requirement under that statute that the service provider ' the franchisee ' must provide services for two or more different persons within a 12-month period or routinely seek to obtain new contracts. If the franchisor is the only “person” for whom services are provided, there could be a problem under that requirement as well.
Franchisors that follow a similar business model should be very concerned with rulings such as this, assuming the independent contractor exclusion does not apply, since in this time of limited state funds, state agencies may become more aggressive in seeking tax revenue and bolstering their unemployment insurance plans. A careful review of similar franchise arrangements may be called for, depending on the ultimate outcome of this dispute.
Dormant Commerce Clause Does Not Prevent Enforcement of Professional Separation Laws
Article 1, Section 8 of the U.S. Constitution, the “Commerce Clause,” gives Congress the power to regulate interstate commerce. Courts have inferred that by giving this power to Congress, the Commerce Clause impliedly prohibits states from taking action that would interfere with interstate commerce, such as by adopting laws that protect local enterprises at the expense of similar businesses from out of state. This unstated but implied aspect of the Commerce Clause is referred to as the “dormant Commerce Clause.” In National Association of Optometrists & Opticians, et al, v. Brown, et al, (2009 WL 1476989 (C.A.9 (Cal.) May 28, 2009)) the dormant Commerce Clause was used as the basis for challenging various California statutes and regulations prohibiting opticians ' dispensers of prescription glasses ' from having specified business relationships with optometrists and ophthalmologists who are health care professionals subject to state licensing.
Two of the key plaintiffs in this action for declaratory judgment and injunction were LensCrafters, Inc. and Eye Care Centers of America, Inc. The plaintiffs maintained that the California laws and rules were protectionist because while optometrists and ophthalmologists, essentially local businesspeople who provide eye examinations, were permitted to offer the services of dispensing opticians at their business locations, opticians, often out-of-state franchises or chains, are prohibited from providing the services of optometrists and ophthalmologists at their locations. The statutes and rules prevent optometrists from having any membership, proprietary interest co-ownership, landlord-tenant relationship, or any profit-sharing relationship in any form, directly or indirectly. An optician cannot employ or provide the services of an optometrist or ophthalmologist, maintain one on or near the optician's premises, or advertise the providing of eye examinations or related services. An optometrist cannot share space with an optician and cannot link his or her name with that of the optician. The district court granted the plaintiffs' motion for summary judgment, declaring the dormant Commerce Clause was violated by the concerned California statutes and regulations.
On appeal, the Ninth Circuit reversed the district court by finding that the concerned laws and regulations, while designed to protect optometrists and ophthalmologists from being influenced by the commercial interests of unrelated businesses, did not discriminate against out-of-state businesses since they applied equally to California-based opticians. Since the purpose of the laws and regulations is not to treat out-of-state businesses differently from in-state businesses, the court gave deference to California's approach to protecting health care providers from the subtle influence of commercial interests, even though that approach gives local optometrists and ophthalmologists a leg up in competing with opticians, whether the opticians are based in California or elsewhere. The court remanded the case to the district court to weigh whether the burden placed by the California statutes and regulations on interstate commerce is “clearly excessive” in relation to the stated local benefits of the restrictions; a finding by the district court could still nullify the laws and rules. The responsibility for showing such a burden is on the plaintiffs.
This case, and the rules it enunciates, should be considered when one or more states have laws or regulations that may affect the practicality of franchises where a professional license is required by the franchisee in order to conduct the concerned business.
Darryl A. Hart is an attorney with Bartko, Zankel, Tarrant & Miller in San Francisco. He can be reached at 415-956-1900.
Employer-Employee Relationship for Unemployment Insurance Purposes
In some franchise arrangements, the franchisor contracts with the ultimate customer, but its franchisees provide the contracted-for services to that end-customer. Janitorial services franchises typically follow this pattern. A great fear of franchisors whose programs follow this pattern is having their franchisees found to be employees for unemployment insurance and other employment-related purposes. A recent decision by an Oregon intermediate appellate court will give those franchisors pause.
Employment Department v. National Maintenance Contractors of Oregon, Inc. (Oregon Court of Appeals, March 19, 2009) BFG 14,102, involved an appeal from a finding by an Administrative Law Judge (“ALJ”) that the defendant (“NMC”) was not an “employer” for purposes of Oregon's unemployment insurance statutes. Employers must, among other things, pay unemployment insurance taxes on “wages paid for services.” “Wages” is defined in the statutes as “all remuneration for employment.” “Employment” under the Oregon law means “service for an employer ' performed for remuneration or under any contract of hire, written or oral, express or implied.” There is an exclusion from this definition for independent contractors, as discussed below. Oregon courts have determined that the intent of the legislature was to give the Unemployment Compensation Act broad and liberal coverage.
NMC enters into agreements with building owners to provide janitorial services. It advises the building owners that the services will be performed by its franchisees. It assigns the responsibility of cleaning some or all of the concerned building to one or more of its franchisees. The building owner pays NMC, which then deducts its royalty, liability insurance premiums, and an office management fee. If a building owner does not pay, the franchisee is not paid by NMC. The franchisee purchases its own equipment and supplies from a list of franchisor-approved items, and must obtain approval of alternate supplies. The other terms of the franchise agreement are typical franchise terms, such as approval of alternate supplies, following the operating requirements of NMC, training requirements, franchisor approval of assignment by the franchisee, right of first refusal, conditions of default, and so forth.
After being assessed for unemployment insurance taxes by the Oregon Employment Development Department, NMC disputed the assessment and requested a hearing before an ALJ. The ALJ found that the franchisees' services were performed for NMC, but their remuneration was from the building owners. As such, no employer-employee relationship existed, and no unemployment insurance taxes were due. The Employment Department appealed.
The Oregon court agreed with the ALJ that the franchisees performed their services for NMC rather than for the building owners, since the franchise agreement terms were in the nature of a subcontract under which the franchisees discharged NMC's obligations to the building owners. The issue then became who paid the franchisee for the services. NMC contended that, although indirect, the payments came to the franchisees by the building owners. The court held, however, that the building owners were under no contractual obligation to pay the franchisees. The franchisee's compensation was NMC's obligation under the parties' franchise agreement. The franchisees did bear the risk of nonpayment by the building owners, the court held; and this made payment to the franchisees conditional upon receipt of payment by NMC, but that did not change the nature of the payments or who was obligated to make them.
NMC argued that since franchises are regulated under Oregon law, the Oregon legislature recognized that a franchise was a unique relationship separate and distinct from that of an employer and employee. The court, however, stated that the Oregon franchise law merely dealt with the granting of a franchise, not with the nature of the ongoing relationship between the parties. Even though the court recognized that a franchise relationship differs from a traditional employment relationship, the court held that a franchise agreement can still provide the elements that satisfy the definitional aspects of the Oregon unemployment insurance law.
NMC had argued before the ALJ that even if it were found that the franchisees provided services to NMC for remuneration under a broad interpretation of the unemployment insurance law, the franchise relationship fell under the exclusion for independent contractors. The ALJ did not reach that issue, since it found that the unemployment insurance law did not apply based on the remuneration issue. Since the court found that the decision of the ALJ was in error on the payment issue and that, absent an exclusion, the tax was valid, the question of whether the NMC franchisees were independent contractors under the law was sent back to the ALJ for determination. ORS 670.600 provides the definition of “independent contractor.” Among the factors that must be satisfied under that statute for such a finding is that the person providing the services “is free from the direction and control over the means and manner of providing the services '” ' something that may depend on the degree of direction provided in the franchise agreement or related manuals or other directives of the franchisor.
Also of interest to NMC, no doubt, is the requirement under that statute that the service provider ' the franchisee ' must provide services for two or more different persons within a 12-month period or routinely seek to obtain new contracts. If the franchisor is the only “person” for whom services are provided, there could be a problem under that requirement as well.
Franchisors that follow a similar business model should be very concerned with rulings such as this, assuming the independent contractor exclusion does not apply, since in this time of limited state funds, state agencies may become more aggressive in seeking tax revenue and bolstering their unemployment insurance plans. A careful review of similar franchise arrangements may be called for, depending on the ultimate outcome of this dispute.
Dormant Commerce Clause Does Not Prevent Enforcement of Professional Separation Laws
Article 1, Section 8 of the U.S. Constitution, the “Commerce Clause,” gives Congress the power to regulate interstate commerce. Courts have inferred that by giving this power to Congress, the Commerce Clause impliedly prohibits states from taking action that would interfere with interstate commerce, such as by adopting laws that protect local enterprises at the expense of similar businesses from out of state. This unstated but implied aspect of the Commerce Clause is referred to as the “dormant Commerce Clause.” In National Association of Optometrists & Opticians, et al, v. Brown, et al, (2009 WL 1476989 (C.A.9 (Cal.) May 28, 2009)) the dormant Commerce Clause was used as the basis for challenging various California statutes and regulations prohibiting opticians ' dispensers of prescription glasses ' from having specified business relationships with optometrists and ophthalmologists who are health care professionals subject to state licensing.
Two of the key plaintiffs in this action for declaratory judgment and injunction were LensCrafters, Inc. and Eye Care Centers of America, Inc. The plaintiffs maintained that the California laws and rules were protectionist because while optometrists and ophthalmologists, essentially local businesspeople who provide eye examinations, were permitted to offer the services of dispensing opticians at their business locations, opticians, often out-of-state franchises or chains, are prohibited from providing the services of optometrists and ophthalmologists at their locations. The statutes and rules prevent optometrists from having any membership, proprietary interest co-ownership, landlord-tenant relationship, or any profit-sharing relationship in any form, directly or indirectly. An optician cannot employ or provide the services of an optometrist or ophthalmologist, maintain one on or near the optician's premises, or advertise the providing of eye examinations or related services. An optometrist cannot share space with an optician and cannot link his or her name with that of the optician. The district court granted the plaintiffs' motion for summary judgment, declaring the dormant Commerce Clause was violated by the concerned California statutes and regulations.
On appeal, the Ninth Circuit reversed the district court by finding that the concerned laws and regulations, while designed to protect optometrists and ophthalmologists from being influenced by the commercial interests of unrelated businesses, did not discriminate against out-of-state businesses since they applied equally to California-based opticians. Since the purpose of the laws and regulations is not to treat out-of-state businesses differently from in-state businesses, the court gave deference to California's approach to protecting health care providers from the subtle influence of commercial interests, even though that approach gives local optometrists and ophthalmologists a leg up in competing with opticians, whether the opticians are based in California or elsewhere. The court remanded the case to the district court to weigh whether the burden placed by the California statutes and regulations on interstate commerce is “clearly excessive” in relation to the stated local benefits of the restrictions; a finding by the district court could still nullify the laws and rules. The responsibility for showing such a burden is on the plaintiffs.
This case, and the rules it enunciates, should be considered when one or more states have laws or regulations that may affect the practicality of franchises where a professional license is required by the franchisee in order to conduct the concerned business.
Darryl A. Hart is an attorney with Bartko, Zankel, Tarrant & Miller in San Francisco. He can be reached at 415-956-1900.
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