Franchisor as Joint Employer, and a Judicial Update

David J. Kaufmann

In today’s column we will address the NLRB’s proposed new regulation addressing who may be characterized as a “joint employer” of another employer’s employee and review recent judicial decisions of consequence to the franchise arena.

NLRB Proposes Joint Employer Rule

On Sept. 18, 2018 the National Labor Relations Board (NLRB) issued a Notice of Proposed Rulemaking, proposing a regulation establishing the standard for determining when two employers could be considered “joint employers” of employees under the National Labor Relations Act. As anticipated, the proposed regulation provides that an employer may be considered a joint employer of another employer’s employees only if the two employers share or co-determine the employees’ essential terms and conditions of employment, such as hiring, firing, discipline, supervision and direction. More specifically, the proposed regulation provides that to be deemed a joint employer, an employer must possess and actually exercise substantial direct and immediate control over the essential terms and conditions of employment of another employer’s employees in a manner that is not limited and routine.

In other words, the NLRB’s proposed regulation would revive the pre-Browning-Ferris (362 NLRB 186 (2015)) standard for determining who may be considered a joint employer by requiring direct, exercised and immediate control by the putative joint employer—and not just the reserved but never exercised authority to control the terms and conditions of employment as Browning-Ferris stipulated.

The NLRB’s Notice of Proposed Rulemaking affords a 60-day comment period expiring Nov. 13, 2018 (with a comment reply period ending Nov. 20, 2018). We anticipate a nasty fight over the NLRB’s proposed new joint employer regulation—already labor unions and their friends in the Democratic party are contending once again that the NLRB is avoiding ethical restrictions on board members by using the regulatory process to overturn Browning-Ferris.

Joint Employer Ruling Reversed

A company engaged in the business of connecting appraisers with its clients, which were insurance carriers, to assist in processing automobile damage claims across the United States was held not to be the joint employer of one such independent appraiser who obtained assignments through the business entity’s web portal in Matter of Courto, SCA Enterprises v. Commissioner of Labor, 1569 A.D.3d 1240 (3d Dept. 2018).

The entity linking appraisers with insurance company clients, SCA Enterprises Inc., utilized a computerized operating system, known as the “dashboard,” to match independent appraisers (as well as its franchisees) with assignments that are posted by its insurance carriers. One such independent appraiser filed a claim for unemployment insurance benefits after those assignments ended and his eligibility for same was conferred by the Department of Labor and sustained by the Unemployment Insurance Appeal Board, following which the within appeal ensued.

In reversing the administrative rulings of eligibility and rejecting the appraiser’s claim of employment, the Appellate Division held:

Initially, it is well-settled that the existence of an employer-employee relationship turns on whether the employer exercises control over the results produced or the means used to achieve the results, with the latter being more important (internal quotation marks and citations omitted). Notably, incidental control over the results, without further evidence of control over the means, is insufficient (citations omitted) …

Upon reviewing the evidence presented here, we conclude that substantial evidence does not support the Board’s finding that an employment relationship existed between SCA and the independent appraisers, including claimant… (SCA’s) dashboard automatically matches the independent appraisers with assignments based upon the particular geographic area. The independent appraiser is free to accept or reject an assignment and, if it is accepted, the independent appraiser contacts the vehicle owner, conducts the appraisal and uploads the final appraisal report to the insurance company via the dashboard…

Significantly, SCA does not withhold taxes from the compensation that it pays to the independent appraisers, reimburse them for expenses or provide them with fringe benefits, training, equipment, tools, uniforms, business cards, supplies or office space. It also does not supervise their work, require them to attend meetings or review their final appraisal reports. Moreover, the independent appraisers set their own work schedules, are free to work for competitors, may take time off without SCA’s permission and refuse assignments without penalty. The requirements of the assignment, including the deadline by which the final report must be submitted, are dictated by the insurance carriers, not SCA… The provisions of the service contract that the independent appraisers sign with SCA designate them as independent contractors and underscore their autonomy. …

Inasmuch as substantial evidence does not support the existence of an employment relationship, the Board’s decisions must be reversed.

Accordingly, the matter was remitted to the Unemployment Insurance Appeal Board for further proceedings consistent with the Appellate Division’s decision.

Finally, for yet another case exemplifying the maxim that joint employer allegations are rarely set aside on a motion to dismiss. See Bonaventura v. Gear Fitness One NY Plaza LLC, 2018 WL 1605078 (S.D.N.Y. 2018).

What Is a Franchise?

An investor in a joint venture company formed to acquire, develop and operate a Buddha Bar bar and restaurant franchise in New York was not a “franchisee” held the court in Mprosiemo v. Vaygensberg, 2018 WL 2321905 (Supp. Ct., N.Y. Cty. 2018).

In Mprosiemo, plaintiff argued that its 30 percent joint venture membership interest, in return for a $1,040,000 investment, inter alia constituted his acquisition of a franchise from the joint venture. (The core allegation in this case is that plaintiff’s fellow co-venturers, who were actively involved in operating the business while plaintiff was merely a passive investor, diverted his opportunity by abandoning the original proposed franchise location, finding another and then forming a separate enterprise to obtain Buddha Bar franchise rights.)

“The Franchise Sales Act claim must be dismissed … because the Member Agreement is an operating agreement for the limited liability company, not a franchise agreement, and therefore the Franchise Sales Act is inapplicable,” held the court. While other causes of action against the defendants were permitted to proceed, plaintiff’s New York Franchise Act cause of action was dismissed in its entirety.

(A most interesting bit of dicta in this opinion is somewhat startling: the court suggested, citing a 1988 case, that “…there is a paucity of reported cases dealing with the Franchise Sales Act… and that there is scarce case law in this area.” As readers of this column are aware, the number of cases reported herein over the past two decades collectively suggest otherwise.)

For an interesting parallel on the franchisor side, see Stavroulakis v. Rodas, 58 Misc. 3d 1221(A), 2018 N.Y. Slip Lp. 50180(U), Unreported Disposition (Sup. Ct. N.Y. Cty. 2018), in which a 16.66 percent owner of franchisor Bareburger, Inc. alleged that his fellow owners transferred all of the company’s assets to other entities in which they (but not plaintiff) had an interest, leaving the original company an empty shell. In this action, plaintiff sought a determination of his stake in the original company and damages for defendants’ conduct.

The Supreme Court granted summary judgment to virtually all of plaintiff’s causes of action (except those that were deemed duplicative) and defendants’ cross-motions for summary judgment were denied.

Bankruptcy

Whether a franchise agreement’s covenant not to compete is a “dischargeable debt” in bankruptcy—or may continue to be enforced post-bankruptcy through limited relief from the Bankruptcy Code’s automatic stay—was addressed in In re Lafemina, 2017 WL 4404254 (U.S. Bankr. E.D.N.Y. 2017).

In Lafemina, dog daycare business franchisor Camp Bow Wow had entered into a franchise arena which was personally guaranteed by the debtor (who agreed to be bound by every provision of the franchise agreement, including its restrictive covenants). After franchisor Camp Bow Wow terminated debtor’s franchise agreement, it commenced an arbitration seeking inter alia an order requiring compliance with the franchise agreement’s covenant not to compete. Just days later, the debtor opened a new dog daycare center under a different name and, when Camp Bow Wow less than two months later sought an injunction prohibiting the debtor from operating that competing enterprise, the debtor filed the subject Chapter 7 case one day before a rescheduled arbitration hearing. Thereafter, franchisor Camp Bow Wow filed a motion for relief from the automatic stay and the debtor responded by filing a cross motion seeking a declaration that the post-termination obligations and restrictive covenants of the franchise agreement were dischargeable.

Rejecting the debtor’s contention, the court held that the injunctive relief which franchisor Camp Bow Wow sought in the arbitration proceeding did not constitute a dischargeable claim and that Camp Bow Wow had demonstrated sufficient cause for the court to grant limited relief from the automatic stay accordingly.

David J. Kaufmann, a senior partner of Kaufmann Gildin & Robbins (New York City), authored the New York Franchise Act while serving as Special Deputy Attorney General of New York. He was voted “2018 New York City Franchise Lawyer of the Year” by Best Lawyers in America (Woodward/White, Inc.).