Franchisor Not Liable to Pay Workers’ Comp to Franchisee’s Employee

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A franchisor of sandwich shops was not a "contractor" under the meaning of the Kentucky Workers’ Compensation Act (KWCA) and therefore was not liable for the payment of workers’ compensation benefits for the injured employee of a franchisee, the Kentucky Supreme Court has decided. Thus, a ruling by a Kentucky appellate court (CCH Business Franchise Guide ¶14,453) was reversed.

Although the appellate court correctly determined that an Administrative Law Judge (ALJ) erred in interpreting the KWCA, the appellate court should not have reversed the ALJ’s ruling, which properly analyzed the facts of the case under the statute and came to the correct conclusion that the franchisor was not a "contractor," the supreme court held.

Coverage of Franchise Relationships

The ALJ’s legal error was in concluding that the General Assembly could not have intended the KWCA to encompass the relationship between a franchisor and franchisee simply because the statute failed to mention such a relationship.

Like the appellate court, the Kentucky Supreme Court was not convinced that the KWCA’s failure to mention franchisor-franchisee relationships evinced an intent on the part of the General Assembly to preclude a franchisor from ever being considered a statutory employer of its uninsured franchisee’s employee. Nothing prevented a franchisor that contracted with another for work that was a regular part of the franchisor’s business from being considered a "contractor" simply because the other party to the contract, the purported "subcontractor," was its franchisee.

Franchisor as “Contractor”

The ALJ’s opinion included findings supporting its conclusion that the franchisor was not a "contractor." While the franchisor did retain some rights (such as the right to be named an additional insured and given notice of cancellation of insurance policies), the relationship was clearly much different than that contemplated by the KWCA.

The ALJ found that the franchisor was in the business of franchising, not the business of selling sandwiches. Thus, the franchisee did not perform a regular or recurrent part of the franchisor’s business, and the ALJ’s finding that the franchisor was not a "contractor" was supported by substantial evidence, the supreme court determined.

The decision is Doctors’ Associates v. Uninsured Employers’ Fund, CCH Business Franchise Guide ¶14,736.