The Third Circuit is Opening the Doors for Franchisees to File Class-Actions Under the WPCL

The Third Circuit is Opening the Doors for Franchisees to File Class-Actions Under the WPCL

The Third Circuit Court of Appeals recently affirmed a lower court’s decision to permit a group of franchisees to file a class action lawsuit against a franchisor; a decision that could potentially lead to franchisees being deemed employees of a franchisor.

In the matter of Darryl Williams; Howard Brooks v. Jani-King Of Philadelphia Inc., et al., No. 15-2049 (3d. Cir., September 21, 2016), two Philadelphia area Jani-King franchisees brought claims against Jani-King under the Pennsylvania Wage Payment and Collection Law (WPCL) seeking to recover alleged unpaid wages. Jani-King contracts with customers directly, then sources the performance of the cleaning services to its franchisees. Jani-King invoices for all work, and pays the franchisee for the work performed from revenues collect from the customer after deducting amounts owed to Jani-King under the Franchise Agreement.  In light of this practice, plaintiffs filed a class action suit as employees of Jani-King to recover alleged unpaid wages.

The District Court granted plaintiff’s motion for class certification. Jani-King appealed the court’s class certification on the grounds that common evidence of franchise agreements and manuals do not alone warrant class certification. Jani-King argued that the court should have considered other factors such as similarity of territory, number of employees, andgross revenue, in determining whether the franchisees could join together in a class action. The Third Circuit granted a hearing, and affirmed the District Court’s class-certification order.

By challenging the appropriateness of plaintiffs’ claim for class-wide resolution, the court focused its analysis on: (1) the commonality requirement of Federal Rule of Civil Procedure 23(a)(2)—whether plaintiff established questions of law or fact common to the class; and (2) the predominance requirement of Rule 23(b)(3)—whether the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.

The Third Circuit then analyzed whether it is appropriate to apply a multi-factor test to determine whether plaintiffs qualify as employees as a whole, rather than examining the relationship between Jani-King and each individual franchisee.  The Court noted that although no single factor is dispositive, the “paramount” factor is theright to control the manner in which work is accomplished.  The Third Circuit focused on the commonality of Jani-Kings’ franchise agreement, policies manual, and training manual, all of which imposed the same terms on each plaintiff, regardless if the franchisee has no employees and services a low-value contract or if the franchisee has dozens of employees and many cleaning contracts.

The court held that these documents grant Jani-King certain rights across all franchisees which “could be read” to give Jani-King the right to control its franchisees. These rights include how often the franchisee must communicate with customers, how the franchisee can advertise, how far in advance franchisees must inform the franchisor of vacations, and how Jani-King controls the franchisees’ work assignments, has the right to inspect the franchisees work, and has the ability to change the policies and procedures as it sees fit. Based upon the commonality of these documents, the Third Circuit upheld the plaintiff’s class certification.

It is worth noting that there was a dissenting opinion, which disagreed with the majority’s decision to avoid addressing the main issue of whether the plaintiffs can actually establish that they are employees based upon the franchise agreements and related documents. The dissent claims the court’s analysis should have focused on whether Jani-King’s level of control exceed what is necessary to protect a franchisor’s trademark, trade name, or goodwill. Overall, the dissent concluded that the purported common evidence was necessary to protect Jani-King’s goodwill and service marks, and outside of those controls there was little evidence on a class-wide basis to prove an employer-employee relationship.

The court’s finding that franchise agreements and related documents may contain sufficient controls to render the parties’ relationship to be one of employment is another blow to the fundamental underpinning of franchise law. While the Court did not address the merits of plaintiffs’ claims at this stage of the proceeding, this decision may nevertheless open the floodgates for franchisees to file class-action suits to be deemed employees by relying on the commonality of franchise agreements, rather than the individual relationship between the parties.  Even if the District Court concludes that plaintiffs are not employees, and may not assert claims under the WPCL, it is reasonably foreseeable that the Third Circuit’s decision will eventually result in a case where a District Court finds otherwise.