The Appellate Division of the New York Supreme Court recently affirmed rulings by New York’s Unemployment Appeal Board that the Jan-Pro Cleaning Systems franchisor was the employer of some of its franchisees for unemployment tax purposes. The case, In re Baez, 2016 WL 6270685 (N.Y. App. Div. Oct. 27, 2016), is an important reminder of the continued need for franchisors to carefully structure their relationships with franchisees to minimize employee misclassification risks.
Following an unemployment insurance tax audit of Jan-Pro, the New York Department of Labor determined that Jan-Pro was the employer of its franchisee, Bertrand Baez, and similarly situated franchisees who operated Jan-Pro janitorial cleaning franchises. After the Unemployment Insurance Appeal Board affirmed this finding, Jan-Pro appealed to the Appellate Division of the New York Supreme Court. In determining whether an employer-employee relationship existed between Jan-Pro and its franchisees, the Appellate Division considered whether Jan-Pro exercised control over its franchisees’ results or the means used to achieve those results—with the latter being given greater weight. Finding an employment relationship, the court pointed to the following substantial evidence of control by Jan-Pro: (i) it assigned franchisees a specific geographic territory; (ii) it mandated initial training paid for by Jan-Pro; (iii) it required franchisees to operate in accordance with Jan-Pro standards and procedures, including the use of Jan-Pro equipment, supplies, products, and business forms; (iv) it helped resolve conflicts between franchisees and their customers; (v) it retained the sole right to invoice and collect from franchisee customers and to discontinue franchisee services to customers; (vi) it provided franchisees with business cards that contained the Jan-Pro name, logo, and address and retained the right to approve alternative business cards; (vii) it imposed a post-termination non-compete; and (vii) it retained control over concepts and techniques developed by franchisees.