• New Developments - Employees V. Independent Contractors
  • April 29, 2011 | Author: Meredith Bauer
  • Law Firm: Larkin Hoffman Daly & Lindgren Ltd. - Minneapolis Office
  • A new development out of the State of Virginia sheds more light on the much-discussed employee versus independent contractor issue in franchising. An opinion released by the Virginia Attorney General analyzes recent state legislation applicable to employers, and determines that franchisees generally do not fall under the definition of an “employee” as contemplated by the new statute.
    The State of Virginia recently adopted the Worker Misclassification Act, S.B. 34, which imposes various sanctions and penalties on employers that misclassify their employees as independent contractors. The bill applies to “employers,” and adopts the common “ABC test” in determining whether an individual working for an employer should be classified as an employee. This test differs from state to state, however, the ABC test in Virginia under the statute determines an employment relationship does not exist when several factors are present, specifically:
    (1) The individual is free from direction and control of the employer, under contract and in fact;

    (2) The service is outside the usual course of business of the employer; and
    (3) The individual is customarily engaged in an independently established trade, occupation, profession or business, both in contract and in fact.
    Guidance was specifically sought from Virginia Attorney General to determine whether the term “employer,” as used in the statute, applies to franchisors with respect to their relationship with their franchisees.
    The Attorney General first recognized that franchising “is a commercial arrangement between two businesses which authorizes the franchisee to use the franchisor’s intellectual property and brand identity, marketing experience and operational methods.” The importance of franchising in Virginia was also recognized, as “franchised businesses employed over 330,000 individuals in Virginia and generated $26.8 billion of economic activity.”
    The Attorney General found that the statute itself does not specifically exclude franchises from its scope. However, the Attorney General then applied the ABC test to franchise relationships and found that, in general, the ABC test would not find an employee relationship to exist between a franchisor and its franchisees. Rather, a franchisee performs services for the profit and account of the franchisee. Also, a franchisee is not being remunerated by the franchisor, and instead, the franchisee pays the franchisor for the privilege of using a trademark and business system. The Attorney General also mentioned that most franchisees operate under a corporate identity, and not as individuals.
    Finally, the Attorney General put weight in the fact that Virginia maintains separate statutes governing the franchise relationship (the Virginia Retail Franchise Act) and as such, the legislature has a view that franchises are a “distinct form of business enterprise.” This fact “bolsters the conclusion that Virginia law does not view typical franchise relationships as an ordinary employer/employee relationship.”