REGULATORY THREAT TO FRANCHISING

Under arrangements typical among franchise providers of janitorial services, for example, a franchisor sells territorial rights to provide janitorial services in a specific geographical area – say, an entire county – to a master franchisee. The master franchisee in turn contracts with the owners of high-rise office buildings in that county to provide janitorial services to all tenants. Rather than provide these services itself, however, the master franchisee offers the rights to service one or more floors in specific buildings to unit franchisees who do the work in exchange for part of the revenue. The master franchisee commonly handles all relations with its customers, negotiating contracts and schedules and the scope of work to be performed, and collects all revenues from which it deducts certain fees before parceling out the rest to the unit franchisees.

State regulators argue that these arrangements step over the line, creating employer-employee relationships between master and unit franchisees. Among other things, regulators argue that the unit franchisees in such arrangements do not operate as independent businesses, as they would in a true franchising arrangement, because master franchisees collect revenues and control the day-to-day servicing of the customer. This makes master franchisees really employers who should follow laws applicable to any employer, including those governing wages and hours and workers’ comp, regulators say.

By itself, however, the fact that master franchisees collect revenues does not make them employers, or even unique among franchise businesses. Among franchisor retailers of flowers and other goods, for example, franchisors follow the identical practice, taking orders from internet or in some cases telephone buyers, collecting revenues directly, deducting fees, and parceling out the balance to franchisees who fulfill the orders. In addition, franchisors in other industries commonly exercise significant control over how and when franchisees provide services to their customers, and although some of the other practices to which regulators object may not be common elsewhere in the franchising industry, they do occur.

Whatever the merits of the regulators’ arguments, the business practices of many unit franchisees in the janitorial and other industries under scrutiny are such as to make government officials at all levels wary. Some unit franchisees, for example, fail to register their business names, pay local business taxes or even, in many cases, obtain federal employer numbers for tax purposes.
Some master franchisees court trouble on other grounds as well. Some fail to buy adequate liability insurance coverage, thus inviting litigation should a unit franchisee worker driving from one job site to another cause an auto accident, injuring someone who might claim that the unit franchisee worker is really the master franchisee’s employee. Some master franchisees may also leave themselves open to litigation from disgruntled workers claiming status as employees entitled to overtime pay and other rights.

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