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Kentucky Surpreme Court Finds Franchisor Not Liable for Workers' Compensation Benefits Paid to Franchisee Employee
Posted in Employment

In Doctors’ Associates, Inc. v. Uninsured Employee’s Fund, 2011 Ky. LEXIS 166 (Ken. Nov. 23, 2011), the Kentucky Supreme Court held that Subway franchisor DAI was not responsible for paying workers’ compensation claims on behalf of a franchisee who failed to maintain workers’ compensation insurance. The injured worker was employed by a Subway franchisee at the time of injury, and the state Uninsured Employers’ Fund paid benefits to the worker. The Fund then brought a claim against DAI seeking repayment of the benefits. At issue was a Kentucky statute that imposes liability for workers’ compensation benefits on entities identified as “contractors.” The statute defines contractors as those who “have work performed of a kind which is a regular or recurrent part of the work of the trade, business occupation, or profession of such person.” The Fund argued that the franchisee performed work that was “a regular or recurrent part” of DAI’s business such that DAI was a “contractor” and liable for benefits under the statute. On appeal, the Kentucky Supreme Court ruled that DAI was not a “contractor” because it was in the business of developing franchises for the purpose of securing royalties, rather than actually operating sandwich shops. The concept at issue in the case is a common component of many state workers’ compensation laws.

Although the court ruled in favor of the franchisor in this case, it held that nothing in the statute prohibits a franchisor from being deemed to be a contractor, and each case must be analyzed individually based on the particulars of the relationship at issue. The court also noted that franchisors can protect themselves from liability by carefully drafting their franchise agreements.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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