PHILADELPHIA – A divided panel of the U.S. Court of Appeals for the Third Circuit recently granted class certification in a case against Jani-King of Philadelphia that alleges the company’s franchisees were improperly
being classified as independent contractors.
Two members of the three-judge panel ruled in favor of class
certification, but Karen Marchiano, of counsel at DLA Piper LLP, said many
franchising experts who were following the case may have preferred to see the
court rule in accordance with the “well-reasoned” dissent.
“The majority’s opinion undermines the essence of
franchising and threatens the economic viability of franchising as a business
model,” Marchiano told the Pennsylvania
“As those in the franchise industry understand, if franchising is
to remain viable, the controls that are set forth in those documents that are
essential to the protection of a franchisor’s brand and trademark cannot be
considered indicia of an employment relationship.”
Marchiano said the majority’s decision turned on its answer
to the question of whether the employment status question could be resolved
through evidence common to the class, as the majority decision concluded that
documentary evidence alone could be sufficient to resolve the multi-factor
employment status test.
In addition, Marchiano said the court ruled that the
franchisee classification issues were susceptible to class-wide determination
through common evidence, including the franchise agreement, policies manual,
training manual and testimony about those documents.
“The majority refused to reach the merits of whether the
controls in the franchise agreement and manuals made Jani-King the employer of
its franchisees under Pennsylvania’s multi-factor employment test,” Marchiano
Specifically, the majority decision said, “Jani-King may
ultimately be correct that the franchise agreement and manual do not contain
sufficient controls over the day-to-day work of its franchisees to make them
employees under Pennsylvania law, and we express no opinion on that matter
here. Either way, it is possible to make
the determination on a class-wide basis.”
According to data provided by Marchiano, there were more
than 750,000 franchised businesses in the United States as of 2013, and those establishments
employed more than 8.3 million people and generated an economic output in
excess of $800 billion. As of 2007, Pennsylvania alone had 29,514 franchise
establishments, with a total payroll of $10.7 billion and more than $82.4
billion in output.
“Franchising is an important component of the U.S. and
Pennsylvania economy,” Marchiano said.
The dissenting opinion, authored by Judge Robert E. Cowen,
echoed that sentiment, citing a previous case filed against Domino’s Pizza,
Inc. that established that franchising constitutes “a bedrock of the American
“Yet the majority’s opinion threatens the viability of this
basic economic bedrock,” the dissenting opinion said. “I predict that the
Pennsylvania Supreme Court would ultimately hold that controls necessary to
protect a franchisor’s trademark, trade name, and goodwill - in short, franchise
system controls’ - are insufficient by themselves to establish the existence of
an employer-employee relationship between the franchisor and its franchisees.”
Marchiano said the dissent also worried that the majority’s
opinion would lead to additional class action litigation against other
franchisors and would be cited to support the proposition that franchise system
controls may by themselves give rise to an employer-employee relationship
Jani-King has requested a rehearing or a hearing before the
full roster of Third Circuit judges.
The International Franchise Association subsequently sought court
approval to file an amicus brief in support of Jani-King’s rehearing petition.
The association said the majority opinion “threatened the viability of and
foundation of franchising.”
The case was appealed following a ruling by the U.S.
District Court for the Eastern District of Pennsylvania.