One of the more vexing problems facing San Diego employers is a myriad of overlapping laws, regulations, and jurisdictions. This is readily apparent when considering how to classify a worker as an “employee” or as an “independent contractor.” Among the various regulations and jurisdictions are California labor law, federal tax law under IRS regulations, federal labor laws, and federal laws with respect to unions and industrial relations.

The complexity and confusion have been particularly problematic for San Diego franchisors and franchisees. Franchisors create franchises because they want to affiliate with independent businesses under a uniform business model. In other words, franchisors do not want “employees.”  If the franchisor wanted that type of relationship, then the franchisor would just open a new location and hire employees. On the other side of the relationship, many franchisees specifically buy a franchise in order to be “their own boss.” In other words, both sides of the franchise relationship desire a relationship that is not an employer-employee relationship. That is the intent and that is the desire.

However, changes in the last few years with respect to the definition of “employees” and “independent contractors” has caused worry and confusion among franchisors and franchisees. In good news, just recently, the federal National Labor Relations Board revised its standard for how to define an “independent contractor” and reinstated the “entrepreneurial opportunity” factor. This was a prominent factor that had been applicable prior to 2014. See SuperShuttle DFW, Inc., Case Number: 16-RC-010963 (NLRB January 25, 2019). See press release here.

For many decades, the National Labor Relations Board used the traditional set of factors to make determinations as to whether a worker was an “employee” or an “independent contractor.” These factors included:

• Extent of control exercised over the worker
• Whether the worker was engaged in a distinct occupation different from the “employer”
• Type of occupation and whether such was typically done by a specialist without supervision or by a worker working under the direction of the “employer”
• Level of skill required
• Who supplied the tool, equipment, work space, etc.
• Length of service
• Whether payment was per-piece or per-hour or other unit of time
• Whether work being done was part of “core business” of “employer”
• What the parties involved believed about their relationship and/or said via contracts

In evaluating these factors, the Board emphasized another important factor: whether the worker had “a significant entrepreneurial opportunity for gain or loss.” Over the years, this “entrepreneurial opportunity” factor became important and was frequently used with respect to employment cases involving franchises. The more the factors and the overall relationship tended to demonstrate “entrepreneurial opportunity,” the more inclined the Board was to find an “independent contractor” relationship. This was “good” for franchise relationships. Without the “entrepreneurial opportunity” factor, the other factors might lead to a determination that franchisees are “employees” because franchisors general exercise a great deal of control, the length of service is generally long-term, the franchisee is engaged in the “core business” of the franchisor, and more.

In 2014, the National Labor Relations Board removed the “entrepreneurial opportunity” factor. This led to a number of cases in which franchise relationships were classified as “employment” relationships. However, as noted, in good news for franchisors and franchisees, with the newly-issued SuperShuttle DWF decision, the Board has reinstated the “entrepreneurial opportunity” factor to the relief of many franchise businesses.

Contact San Diego Corporate Law

For more information, contact franchise law attorney Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has extensive experience helping San Diego residents buy and sell their franchises. Mr. Leonard can be reached via email or by calling (858) 483-9200. Like us on Facebook.

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