State regulators across the country are out to blur the distinction between franchisors and employers, and if they succeed, they could crimp the growth of one of the franchise industry’s hottest segments – franchise providers of janitorial, security guard, industrial gardening, delivery and other services to commercial clients.

Regulators say that the providers of such services, who sign on as “unit franchisees” under master franchisees, are really employees of the master franchisees, and they want the master franchisees to withhold payroll taxes, obey state labor laws regulating wages and overtime, provide workers’ comp insurance, and take on all the other legal responsibilities of employers.

Given the often unique franchising relationships among operators in the industries under scrutiny, the regulators may have a point, making it necessary for the companies operating in these fields to step carefully. How can companies protect themselves?

The problem stems from the special nature of the franchise relationship itself and from the practices of many franchise operators in these fields. In many states, the law carefully defines the franchise relationship, and if a business arrangement fails on one or more points, it is not a franchise relationship. Under California franchise law, for example, a franchisor is one who offers, sells, or distributes goods or services through one or more “substantially associated” business enterprises following a marketing plan “prescribed in substantial part” by the franchisor in exchange for a fee collected directly or indirectly from those enterprises.

Next week I’ll address what makes one business “substantially associated” with another.


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