Pennsylvania franchisors are handed victory in employment status debate

By Carrie Salls | Jan 18, 2017

HARRISBURG – Franchisors in Pennsylvania were handed a legal victory in the debate over whether a franchisor can be considered the employer of its individual franchisees.

In a case involving a Saladworks franchisee employee's on-the-job injury, the state Supreme Court on Dec. 16 allowed a Commonwealth Court ruling to stand, which allows the franchisor to avoid liability.

“The court held that Saladworks was not a statutory employer because it was in a different line of business than its franchisee,” Alexander S. Radus, an associate at Fox Rothschild LLP, told the Pennsylvania Record. “As the court noted, Saladworks sells franchises, not salads.”

The franchisee’s employee was injured on the job, and the franchisee did not have Workers’ Compensation insurance. As a result, the courts were left to determine whether franchisor Saladworks LLC could be held liable under the commonwealth’s Workers’ Compensation law.

“(The Commonwealth Court) ruled that Saladworks was not liable because Saladworks did not employ the worker,” Radus said.

Although the state Supreme Court originally agreed to hear the case, Radus said it eventually dismissed the appeal as “improvidently granted.”

“This means the decision of the Commonwealth Court remains intact,” Radus said. “We don’t know why the PA Supreme Court dismissed the case, because there is no opinion explaining its position.”

Radus said the Commonwealth Court’s decision illustrated the relationship between franchisors and franchisees.

“The franchisor establishes the products and services that the franchisee will sell and provides the franchisee with a system to operate the business,” he said. “However, the franchisee, not the franchisor, is the employer of the franchisee’s employees.”

The state Workers’ Compensation Act requires employers to provide Workers’ Compensation coverage for employees. Radus said employees are generally covered by their direct employers, but if a direct employer doesn’t have coverage, employees may be able to hold an indirect employer liable if it is a “statutory employer” under the act.

“The important statutory language is this: A company is a ‘statutory employer’ if it contracts with another ‘to have work performed of a kind which is a regular or recurrent part’ of its business,” Radus said.

Before the Saladworks case got to the Commonwealth Court, it was decided by the Workers’ Compensation Appeal Board, which ruled that Saladworks was a statutory employer because it contracted with its franchisee to perform work which was a “regular or recurrent part of” Saladworks’ business.

The Commonwealth Court reversed the board’s decision.

“It recognized the difference between Saladworks’ business model and the business engaged in by its franchisees,” Radus said. “Specifically, the Commonwealth Court understood that making salads and running a restaurant was not a regular or recurrent part of the franchisor’s business.”

Radus said he was surprised that the state Supreme Court agreed to take the case.

“The Commonwealth Court’s decision was firmly grounded in the law and showed a strong understanding of the franchise model,” he said. “This may be why the PA Supreme Court ultimately dismissed the appeal as improvidently granted.”

In addition, Radus said “Pennsylvania is a relatively franchise-friendly state.” He said other states require franchisors to go through a state registration process; Pennsylvania does not.

The case involved a worker who slipped in a Philadelphia Saladworks restaurant and was left with injuries to both knees, but who discovered upon seeking Workers' Compensation that the franchisee did not carry the insurance.

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