Originally published January 2016
Is a franchisor liable as a "statutory employer" under Pennsylvania law if its franchisee fails to obtain workers' compensation insurance? The Pennsylvania Supreme Court recently answered "no" under the facts of Saladworks, LLC v. W.C.A.B. (Gaudioso). The decision is a victory for franchisor Saladworks on a narrow legal issue. But it is a bigger win for the franchise model itself, which relies on the premise that a franchisor is not the employer of its franchisee's employees.
In Saladworks, an employee of a Saladworks franchisee was injured on the job. The franchisee did not have proper workers' compensation insurance coverage. Under Pennsylvania law, when an employee is unable to recover from its direct employer, the employee can file a workers' compensation claim against a "statutory employer" under the Pennsylvania Workers' Compensation Act. If Saladworks was found to be a statutory employer, it would be liable for the employee's injuries.
The Workers' Compensation Judge initially held that Saladworks was not a statutory employer. However, the Workers' Compensation Appeal Board (the "Board") reversed that decision and held Saladworks liable for the employee's injuries. The Board found that Saladworks was a statutory employer because it contracted with the franchisee to perform work which was a "regular or recurrent part of Saladworks' business, occupation or trade."
Here, the Board fundamentally misunderstood the franchise model. Saladworks sells franchises. Its franchisees sell salads and other food products. For those familiar with franchising, these are distinctly different businesses. In making its decision, the Board misinterpreted the franchise agreement, which (naturally) granted Saladworks franchisees the right to open a restaurant according to the Saladworks' system. The Board read this to mean that the franchisee was engaging in the same business as the franchisor, as if Saladworks had engaged a subcontractor to perform its regular duties.
On appeal, the Commonwealth Court reversed the Board's decision. It recognized the difference between Saladworks' business model and the business engaged in by its franchisees. In short, the court reasoned that "Saladworks is not trying to sell more salads . . . ." The employee was injured while working for a franchisee engaged in the sale of food products, an entirely different business model than selling franchises.
The Supreme Court of Pennsylvania dismissed the appeal from the Commonwealth Court's decision as improvidently granted. As a result, the Commonwealth Court's holding remains intact. Whether or not franchisors are liable if franchisees fail to obtain workers' compensation insurance is a narrow issue. But the decision was a victory for Saladworks nonetheless. However, the big win is for the franchise model itself. The Board's decision was based on a fundamental misunderstanding of the relationship between franchisor and franchisee. Had the decision been allowed to stand, it could have set a precedent for other cases dealing with broader issues. The Commonwealth Court's decision (as upheld by the Supreme Court) was based on a strong understanding of the franchise model, which will benefit franchisors and franchisees alike in future litigation.
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