Thursday, June 07, 2012

Is a Franchisee an Employee or an Independent Contractor?

This posting was written by Bruce S. Schaeffer of Franchise Valuations, Ltd., co-author of CCH Franchise Regulation and Damages.

The Awuah saga continues. Most recently, District Court Judge William G. Young, in Awuah v. Coverall North America, Inc. (D. Mass, No. 1:07-cv-10287-WGY, March 15, 2012), ruled that Massachusetts Coverall franchisees were employees for labor law purposes and imposed treble damages going back six years, holding “the contractual limitation period, two years, does not govern the Wage Act claims.” Coverall’s motion for leave to take discovery and file an expert report was denied.

As we have previously noted, this issue as to the status of franchisees also resonates with disputes over vicarious liability.

In one case sounding in vicarious liability, a Mississippi federal district court held that there was a genuine issue of material fact under Mississippi law as to whether the relationship between a janitorial business franchisee and a franchisor was an employer-employee relationship or whether the franchisee was an independent contractor because conflicting factors in the agreement between the parties supported the existence of both arrangements. Thus, the question was one for a jury to decide, and the franchisor’s motion for summary judgment on the issue was denied. (Hayes v. Enmon Enterprises, LLC, CCH Business Franchise Guide ¶14,647, S.D. Miss. June 22, 2011)

More recently, an interlocutory appeal to the Ninth Circuit was certified by the federal district court in San Francisco to determine whether the issue of a “right to control” was the same for employment classification claims as it was in the franchise context. (Juarez v. Jani-King of California, Inc., CCH Business Franchise Guide ¶14,787, N.D. Cal. February 16, 2012)

Terminated Hotel Franchises: Liquidated Damages or Lost Future Royalties?

The case of Days Inn Worldwide, Inc. v. Investment Properties of Brooklyn Center, LLC (CCH Business Franchise Guide ¶14,756, D. Minn., August 26, 2011) has again raised the issue of hotel franchisors’ rights to lost future royalties—in this case in the context of a default judgment. In Days Inn, the franchisee defaulted three years into a 15-year term by selling the property after failing quality inspections and not paying royalties for the last several months of his hotel operation.

The franchisor sued, won a default judgment, and then claimed the remaining 12 years of royalties, discounted to present value, as damages. The judge disagreed, specifically referencing other case law holding that hotel franchisors were allowed to collect an amount—actually more akin to liquidated damages—equal to only the royalties forsaken during the period it would take them to re-franchise the area. These cases, with showings by the franchisor of how long it took them to re-franchise, generally provided franchisors with damages equal to two years of royalties.

Legal Journals Give New Attention to Income Tax Nexus

The denial of certiorari in KFC Corp. v. Iowa Department of Revenue (U.S. Supreme Court Dkt. No. 10-1340, cert. denied, October 3, 2011) has spawned a new round of legal articles claiming that the issue of economic nexus for income taxes is new. (See, e.g., Gary R. Batenhorst & Adam W. Barney, “The Quagmire of the State Income Tax Nexus in the Wake of KFC v. Iowa Dept of Revenue,” Franchise Law Journal, Vol. 31, Number 3 (Winter 2012); and Scott M. Susko and Meghan J. Schbmehl, “Dealing with a Changing State Tax Landscape,” Franchising World, March 2012.)

Let us remember the late Lew Rudnick’s article about the 1993 Geoffrey case, establishing economic nexus, which he described as jeopardizing the license revenues of Walt Disney, Mickey Mouse, and Michael Jordan. (See Minear and Rudnick, “South Carolina Extends the Reach of State Income Taxes to Franchisors,” Franchise Legal Digest, Fall 1993.)

Additional information on the issues discussed above is available in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.

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