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Sept. 21 — Two janitors working as Jani-King “franchisees” in Philadelphia may pursue a class action alleging that they and about 300 similar franchisees are wrongly classified as independent contractors and should be deemed employees, a divided U.S. Court of Appeals for the Third Circuit ruled ( Williams v. Jani-King of Phila., Inc. , 2016 BL 310454, 3d Cir., No. 15-2049, 9/21/16 ).
Attorneys for both sides declared at least a partial victory over franchising issues that are currently being litigated in other courts as well.
The court’s ruling that franchise arrangements aren’t exempt from the usual employee-independent contractor analysis is “a great victory” for the workers, said Shannon Liss-Riordan, a Boston attorney who represents the janitors.
She has been litigating for more than 10 years the employee status issue against Jani-King and other cleaning services that use the franchising tactic to “sell jobs” to janitors who often are immigrant workers, Liss-Riordan told Bloomberg BNA Sept. 21.
The Massachusetts courts found the franchising arrangement unlawful, but a federal district court in California denied class action status to janitors suing for employee status, Liss-Riordan said. Her firm is appealing the California case to the U.S. Court of Appeals for the Ninth Circuit, she said.
Documents that establish “franchise system controls,” including the franchise agreement and manuals, are common evidence that may be used to certify the janitors’ class action, the court ruled 2-1.
Jani-King is “disappointed” because the ruling could “encourage more class actions against franchisors,” said Stephen Hagedorn, the company’s general counsel in Addison, Texas.
But the court didn’t rule on whether the Jani-King franchisees should be classified as employees, and it said the company may “very likely prevail” on that issue, Hagedorn told Bloomberg BNA Sept. 21.
“We ultimately feel we will prevail in this case,” he said.
Meanwhile, a lawyer who represented the International Franchise Association as an amicus for Jani-King said the majority’s reasoning is troubling.
The “franchise system controls” are required by the Lanham Act as a condition for operating as a franchise, said Jonathan Solish of Bryan Cave in Santa Monica, Calif.
If courts can cite those controls as evidence of an employee relationship, then every franchisor is in danger of having its franchisees seek employee status in class actions, Solish told Bloomberg BNA Sept. 21.
The franchise agreements covering the janitors may be the “canary in the coal mine” for similar franchising arrangements that hotels, restaurants and other industries use to provide services, Solish said.
The court didn’t rule on whether the Jani-King franchisees are employees under state law.
Rather, it said the janitors’ misclassification claims can be established through common evidence—including the Jani-King franchise agreement and manuals—and the lawsuit therefore may proceed as a class action.
Claims the janitors are employees under Pennsylvania state law can be proven through common evidence, and common issues predominate over individual questions, the Third Circuit said in a 2-1 decision.
In dissent, Judge Robert E. Cowen said the decision is at odds with basic class action principles, the nature and importance of the franchisor-franchisee relationship, and prior franchising case law.
The district court “clearly committed reversible error” by finding that common factual and legal questions predominate over individual ones for purposes of Rule 23(b)(3) of the Federal Rules of Civil Procedure, the dissent said.
On appeal, Jani-King argued the janitors can’t show a “common question of law or fact,” as required by Rule 23(a)(2), or that common questions predominate over individual issues.
Under relevant Pennsylvania law, a multifactor test determines if a worker is an employee or independent contractor, Judge D. Michael Fisher wrote in an opinion joined by Judge Michael A. Chagares.
“Although no factor is dispositive, the ‘paramount’ factor is the right to control the manner in which the work is accomplished,” Fisher said, citing relevant state court decisions.
Jani-King argued a showing of “actual control” by the alleged employer, not the right to control, is the key factor.
But the Pennsylvania Supreme Court has held “the right to control is more significant” than an alleged employer’s actual control of work performance, the Third Circuit said.
Based on the state court decisions, the Third Circuit predicted the Pennsylvania Supreme Court would apply the multifactor test to decide the employee or independent contractor issue in the franchise context.
“We also predict that the right to control, rather than actual control, is the most important of these factors,” Fisher wrote.
The district court summarized the controls placed by Jani-King on the janitors through the franchise agreement and the company’s various manuals.
Those documents are common to the class, as “they apply to the franchisee who has no employees and services a low-value contract and to the franchisee with dozens of employees and many cleaning contracts,” the Third Circuit said. “These documents describe the level of Jani-King’s right to control its franchisees.”
They also address the “secondary factors” that Pennsylvania courts use to decide if workers are independent contractors or employees, the court said.
The district court didn’t err in concluding the documents “could be read” to give Jani-King the right to control its franchisees, the Third Circuit said.
Jani-King on appeal asked the court to “weigh in” on the merits of the janitors’ claim that they are employees, the court said. But its role is limited to deciding if the district court abused its discretion in certifying a class action, the court said.
“Jani-King may ultimately be correct that the franchise agreement and manual do not contain sufficient controls over the day-to-day work to make them employees under Pennsylvania law, and we express no opinion on that matter here,” the court said.
But “either way, it is possible to make that determination on a class-wide basis,” the court said.
It rejected Jani-King’s argument that franchises are “inherently different” from other types of business relationships and that “franchise system controls” should be “categorically excluded” when deciding if an employment relationship exists.
Instead, the court said the relevant Pennsylvania cases don’t support “the proposition that franchise system controls are somehow categorically excluded from consideration” in the employee-independent contractor analysis.
David J. Cohen in Philadelphia also represented the janitors. Faegre Baker Daniels represented Jani-King.
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The opinion is available at http://www.bloomberglaw.com/public/document/Williams_v_JaniKing_of_Phila_Inc_No_152049_2016_BL_310454_3d_Cir_ .
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