Labor Laws and the Franchised C-Store

In recent years, states have stepped up enforcement of their laws governing the use of independent contractors. This wouldn't normally be a concern for the convenience store industry, but the heightened enforcement and regulation in this area has crept into the laws that govern franchises.

Viewed by some state regulators as a way to avoid unionization as well as making contributions to workers compensation and unemployment insurance funds, the use of independent contractors has mostly come under scrutiny in the construction and home building industries. From coast to coast, states are amending their laws to crack down on companies alleged to have misclassified their workers. In their hunt for dollars, some state officials have so narrowly defined the term "independent contractor" that entrepreneurs who have invested in a franchised business are being declared the employee of the franchisor.

This phenomenon initially focused on home-based businesses, but has more recently brought bricks-and-mortar retail businesses into the crosshairs. It's hard to imagine someone who invested many thousands of their own dollars into a franchised convenience store being suddenly declared an employee, rather than a business owner, but it is happening.

In 2009 a group of state attorneys general decided to engage in the fight over misclassifying workers. They felt that the use of independently contracted drivers by FedEx's ground delivery system violated the letter and spirit of both state and federal laws. In their zeal to change the way FedEx conducts its business, these seven attorneys general did not appear to fully grasp the impact of their legal challenges on the way franchised retail operates. Convenience stores are unlikely to get caught up in this particular legal fight, but the aggressiveness of the AGs has stoked the fire in statehouses around the country. This trend of misapplying independent contractor laws to the franchise business model is unfortunately on the upswing.

In half of the states a service provider is presumed to be an "employee," and not an "independent contractor," unless the accused employer can pass three tests. The tests are collectively known as the "ABC test." One typical state amendment makes anyone who performs services under the "direction and control" of another person that person's "employee," unless the alleged employer can show that the person providing services is completely "free" from such direction and control. Defining how much "control" is too much "control" is sure to be debated in many courts and legislative hearing rooms. Is requiring a certain logo to be used above your store entrance too much control? What about a franchised convenience store being asked to sell a particular brand of fuel?

As we all know, franchisees are entrepreneurs who have chosen to start an independent business by affiliating themselves with a known and proven brand and business system. Business format franchises such as convenience stores were created to give entrepreneurs the ability to use the intellectual property and business plan of a franchisor. The franchisor develops and maintains the brand, while owners of franchise outlets actually provide the product or service to the ultimate customer.

An example, from a restaurant heavily engaged in co-locating units in convenience stores, is the ongoing dispute that Doctors Associates Inc., franchisor of the Subway brand, continues to challenge in Kentucky. In that state, DAI is being held liable for workers comp contributions of its franchisees and their employees. The case is currently on appeal before the Kentucky Supreme Court.

Aside from the troubling aspect of being held liable for back contributions to state workers comp and unemployment insurance funds, disrespecting the franchise contract between the two parties has another, potentially more expensive, effect: vicarious liability. If franchisees and their employees are deemed to be under the 'scope of employment' of the franchisor, then a spilt cup of hot coffee on a customer's lap, or an inappropriate advance from one employee to another, becomes an act for which the franchisor in more likely to be held responsible, in civil or criminal court, than under an arms-length franchise arrangement.

The ultimate irony, though, is that if a franchisor chose to more aggressively root out such behavior through personnel changes, those efforts to "control" behavior at a franchised store may also be deemed as violating the threshold of independent contractor relationships. This example is but one reason national brands have chosen the franchise business model as the most efficient way to grow their brands.

Times are tough for state budgets, and it's no surprise the search is on for cash under the couch cushions. But over-regulating businesses as if they were engaged in an employee relationship just to get the workers comp and unemployment insurance dollars is no way to improve the business climate in this country and get us back on the path to prosperity once again. If you're a franchisor of convenience stores and the state department of labor comes calling, don't be surprised when your company just added several thousand new employees. And if you own a franchised convenience store, well, just make sure you can prove it.

Joe Kefauver is Managing Partner of Parquet Public Affairs, a national issue management, communications, government relations and reputation assurance firm specializing in service sector industries. Parquet's clients include Fortune 500 corporations, trade associations, regional businesses and non-profit organizations. www.ParquetPA.com

Editor's note: The opinions expressed in this article are the author's, and do not necessarily reflect the views of Convenience Store News.