Janitorial services franchisor Jan-Pro Franchising International, Inc. (“Jan-Pro”) is not the employer of its unit franchisees, according to a recent California federal court decision. Roman v. Jan-Pro Franchising Int’l, Inc., No. C 16-05961 WHA (N.D. Cal. May 24, 2017). The plaintiff franchisees failed to show that Jan-Pro exercised sufficient control over their day-to-day employment activities.

What makes this case unique is that Jan-Pro operates a three-tiered franchising structure, often called a subfranchise arrangement. Under this arrangement, Jan-Pro grants subfranchise rights to a regional master franchisee (“Master Franchisee”), who is responsible for selling Jan-Pro unit franchises to individual franchisees (“Unit Franchisees”) in a particular geographic territory. The Unit Franchisees operate the franchised cleaning service business. Importantly, as is common in a subfranchise arrangement, Jan-Pro never directly contracts with its Unit Franchisees. Instead, Jan-Pro directly contracts with its Master Franchisees. Then, the Master Franchisees directly contract with the Unit Franchisees.

The plaintiff Unit Franchisees claimed that they were misclassified as independent contractors when they were really Jan-Pro’s employees. They sought minimum wages and overtime premiums from Jan-Pro. The plaintiffs argued that they were Jan-Pro’s employees under California law because the contracts between Jan-Pro and its Master Franchisees permitted Jan-Pro to control the business of the Master Franchisees and Unit Franchisees through its policies and procedures.

Under California law, “to employ” means

1. To exercise control over the wages, hours or working conditions, or
2. To suffer or permit to work, or
3. To engage, thereby creating a common law employment relationship.

Martinez v. Combs, 49 Cal. 4^th 35, 64 (2010). However, in the franchise context, controlling the “means and manner” of a franchisee’s operations is not sufficient to make a franchisor an employer. A franchisor is only an employer if it retains or assumes general control over employment matters such as hiring, direction, supervision, discipline and discharge. Patterson v. Domino’s Pizza, LLC, 60 Cal. 4^th 474, 498 (2014).

The court concluded that Jan-Pro did not employ the Unit Franchisee’s employees. It reached this result despite the fact that the Master Franchisees exerted control over the Unit Franchisees under the contracts between them. Critical to the court’s analysis was the fact that these contracts did not confer any rights on Jan-Pro to control or terminate the Unit Franchisees. Nor was Jan-Pro a third party beneficiary of these agreements, which could give Jan-Pro the right to directly enforce them. Moreover, Jan-Pro never directly contracted with the Unit Franchisees.

The court’s analysis focused on features that are specific to subfranchise arrangements, especially the lack of a direct contractual relationship between Jan-Pro and its Unit Franchisees. A subfranchise arrangement is only one form of multi-unit arrangement, and is not appropriate for all franchise systems. Franchisors engaged in or considering this system should perhaps not put too much emphasis on the court’s analysis. For one thing, a franchisor may want to have some contractual rights it can enforce directly against Unit Franchisees. Additionally, even if Jan-Pro had directly contracted with Unit Franchisees, there appeared to be scant evidence that Jan-Pro controlled employment conditions in a manner that would make it a joint employer. However, if a franchisor were to indirectly control employment conditions through a subfranchise arrangement, a court might come to a different conclusion. In any event, the court’s decision was well reasoned and grounded in a firm understanding of franchising. It was certainly a win for the franchise model, made especially important by the fact that it took place in California, which is typically considered an employee and franchise friendly jurisdiction.