In In re Baez, a potentially important case for franchisors, Jan-Pro Cleaning Systems, a janitorial franchisor, was held responsible for unemployment insurance contributions on remunerations paid to franchisees.

In Baez, franchisee-claimant operated a cleaning service pursuant to a Jan-Pro franchise agreement. In 2009, franchisee-claimant ceased operations and applied for unemployment insurance. During the same time frame, the Department of Labor conducted an unemployment tax audit of Jan-Pro and determined that claimant-franchisee and others were actually employees of Jan-Pro, and, thus, that Jan-Pro owed additional unemployment insurance contributions. After a series of appeals, the Appellate Division of the New York Supreme Court affirmed the state’s Unemployment Insurance Appeal Board (“the Board”)’s ruling that Jan-Pro’s franchisee was, in fact, an employee.

New York courts have previously held that whether an employment relationship exists within the meaning of unemployment insurance law is a factual question for the Board to determine. No single factor is determinative, but, in general, an employment relationship will be found when it is shown that the employer exercises control over results produced or, more critically, whether the employer controls the means used to achieve results.

The Appellate Court in In re Baez held that there was substantial evidence in the record to support the Board’s finding of an employer-employee relationship because: (i) Jan-Pro assigned claimant-franchisee a specific geographical territory; (ii) Jan-Pro required new franchisees to undergo initial mandatory training, which was paid for by Jan-Pro; (iii) franchisees in the Jan-Pro system were required to operate in accordance with procedures established at training, and standards set by Jan-Pro; (iv) franchisees were required to use Jan-Pro sanctioned equipment, supplies, products and business forms; (v) Jan-Pro helped resolve complaints between customers and franchisees and retained the right to discontinue a franchisee’s service to customers at any time; (vi) initially, Jan-Pro provides all franchisees with business cards with Jan-Pro’s logo and listing Jan-Pro’s name, logo and address; (vii) if franchisees wish to design their own business cards, any designs require Jan-Pro’s approval; (viii) if claimant-franchisee developed new concepts or techniques to improve Jan-Pro’s business, they became Jan-Pro’s property; (ix) the franchise agreement contained a one-year non-compete provision; (x) the franchise agreement gave Jan-Pro the sole right to invoice and collect from claimant-franchisee’s customer accounts, maintain revenue records with respect to such accounts and accept payment from claimant’s customers.

Franchise agreements commonly provide for many of the “controls” over franchisee operations that were identified in the Appellate Court’s ruling. Geographical territories, training, operating according to standards, advertising and marketing standards and non-compete provisions are all standard terms governing franchise relationships. Without such controls, many franchisors worry they will be unable to uphold their system’s standards. It remains unclear, at this point, whether the Baez decision’s application will be limited to the particularities of the Jan-Pro franchise system, or whether the decision has broader implications for the franchise model.