FLSA/Wages

Employee or Independent Contractor? Right to Control Is Key

by Kevin J. Skelly, JD, Day Pitney LLP

The U.S. Court of Appeals for the 3rd Circuit (which covers Delaware, New Jersey, and Pennsylvania) recently concluded that the right to control, rather than actual control, is the key factor in differentiating employees from independent contractors under a state wage and hour law.

Facts

Jani-King, which proclaims itself to be the world’s largest commercial cleaning franchiser, provides janitorial and other cleaning services to offices, restaurants, warehouses, and other commercial buildings. To obtain a franchise, an individual must pay a monetary sum to Jani-King and sign a franchise agreement. The company classifies its franchisees as independent contractors.

Jani-King exercises substantial control over its franchisees. For example, the company maintains policy and procedure manuals that control how franchisees interact with customers. It also dictates the uniforms they must wear. Any marketing materials used by franchisees must be approved by Jani-King.

Franchisees must make monthly reports to Jani-King about all the services and supplies they invoice. They must respond to any inquiries from Jani-King within 4 hours. Jani-King also prescribes rules for how franchisees are to respond to customer complaints.

Two franchisees filed a class action lawsuit against the company alleging that they and about 300 other franchisees in the Philadelphia area were owed wages under the Pennsylvania Wage Payment and Collection Law (WPCL). After the federal district court granted class certification, Jani-King appealed that decision to the 3rd Circuit.

3rd Circuit’s Decision

The main issue on appeal was whether the franchisees’ claims were suitable for classwide treatment. Specifically, the court needed to determine whether there was sufficient commonality among the franchisees to warrant a class action lawsuit.

To prove their wage claim under the WPCL, the franchisees must prove that they are employees of Jani-King. If, as the company claims, its franchisees are independent contractors rather than employees, they wouldn’t have a claim because independent contractors aren’t covered by the WPCL.

In analyzing whether a worker is an employee or an independent contractor, courts will consider a number of factors, including who controls the manner of the work, the terms of the agreement between the parties, which party supplies the tools and equipment, whether the work is part of the regular business of the company, and who has the right to hire and terminate employment, among other factors. The 3rd Circuit explained that the “paramount” factor is the “right to control the manner in which the work is accomplished.” As a result, the actual control.

Having decided that the right to control is the most important factor, the court went further and held that the worker misclassification claims can be resolved by evidence that is common to the class of franchisees.

Many common elements are shared among the Jani-King franchisees, including the franchise agreement and the policy and training manuals. Therefore, the court affirmed the lower court’s decision to grant class certification.

Bottom Line

Employees have significantly more legal protections than independent contractors and other nonemployees. Accordingly, misclassifying a worker as an independent contractor can result in substantial legal and financial liability. It’s important to clearly define the scope of the work performed by your employees and independent contractors. The nature of the relationship should be described in clear language in a written document.

You must be especially mindful of how you interact with independent contractors and other workers who aren’t “employees.” If you exercise significant control over, or give yourself the right to control, too many aspects of an independent contractor’s work, a court may find that the worker is an employee. Such a finding will expose your company to potential administrative and judicial penalties.

Kevin J. Skelly is a contributor of New Jersey Employment Law Letter.