Dep't of Labor & Indus. of Wash. v. Lyons Enters., Inc.

• Decision Date: 19 May 2016
• Docket Number: No. 91610–1.,91610–1.
• Parties: DEPARTMENT OF LABOR AND INDUSTRIES OF the STATE of Washington, Respondent, v. LYONS ENTERPRISES, INC. d/b/a Jan–Pro Cleaning Systems, Petitioner.
• Court: Washington Supreme Court

185 Wash.2d 721

374 P.3d 1097

DEPARTMENT OF LABOR AND INDUSTRIES OF the STATE of Washington, Respondent,

v.LYONS ENTERPRISES, INC. d/b/a Jan–Pro Cleaning Systems, Petitioner.

No. 91610–1.

Supreme Court of Washington, En Banc.

Argued Jan. 21, 2016.

Decided May 19, 2016.

As Amended July 13, 2016.

Reconsideration Denied July 14, 2016.

As Amended August 15, 2016.

Ryan P. McBride, Lane Powell PC, Seattle, WA, Petitioner.

Steve Vinyard, Attorney General's Office, Labor & Ind. A.G. Office, Attorney at Law, Olympia, WA, for Respondent.

Douglas Clayton Berry, Daniel J. Oates, Miller Nash Graham & Dunn LLP, Seattle, WA, amicus counsel for International Franchise Association.

Robert Andrew Battles, Association of Washington Business, Olympia, WA, amicus counsel for Association of Washington Business.

FAIRHURST

, J.

¶ 1 The Industrial Insurance Act (IIA), Title 51 RCW, requires employers to report and pay workers' compensation premiums for all covered workers, including independent contractors, provided the principal-independent contractor relationship meets certain criteria. Lyons Enterprises Inc. is a regional franchisor of an international janitorial franchise operating in western Washington. The Department of Labor and Industries (L & I) determined that some of Lyons' franchisees, those that did not actually employ subordinates, met the IIA's definition of “worker” and assessed workers' compensation premiums against Lyons for those franchisees. The parties have now appealed the initial agency audit through four different administrative and judicial bodies that have reached varying results as to whether Lyons' franchisees are covered workers. As part of these determinations, each adjudicative body that ruled that Lyons' franchisees were workers has also considered whether the franchisees are exempt from coverage under this court's decision in White v. Department of Labor & Industries, 48 Wash.2d 470, 294 P.2d 650 (1956)

or under RCW 51.08.195. Again, the answer to the exemption question has changed at nearly every level of review.

¶ 2 Most recently, Division Two of the Court of Appeals agreed with the agency audit that those franchisees who did not actually employ subordinates were workers covered by the IIA and that the franchisees were not exempt from IIA coverage under White or RCW 51.08.195

. Dep't of Labor & Indus. v. Lyons Enters., Inc., 186 Wash.App. 518, 543, 347 P.3d 464, review granted, 183 Wash.2d 1017, 355 P.3d 1153 (2015). The Court of Appeals, however, remanded the case to the Board of Industrial Insurance Appeals (Board) to make a factual determination as to each of Lyons' franchisees. Id. We granted review of Lyons' appeal.

¶ 3 Whether the franchisor-franchisee relationship is subject to the IIA is a question of first impression for this court. We affirm the Court of Appeals and remand to the Board to determine which of Lyons' franchisees actually employ subordinates.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY A. Factual background

¶ 4 Jan–Pro Franchising International, Inc. is a franchise that uses the “Jan–Pro System” to provide janitorial services to thousands of customers throughout 48 states and 9 countries. Clerk's Papers (CP) 1902–03. Lyons is a regional franchisor for Jan–Pro International that operates in western Washington.

¶ 5 A franchisor generally provides a licensed privilege to the franchisee to operate the franchise business. A franchisee becomes part of the Jan–Pro System by entering a franchise agreement with Lyons. Under Lyons' franchise agreement, the franchisee pays a franchise fee, a royalty for the use of the Jan–Pro name and methods, and management fees for Lyons' business support. On each cleaning contract, franchisees must pay Lyons a 10 percent royalty fee and a 5 percent management fee. Lyons remits 3 percent of the gross billing amount to Jan–Pro International and remits the remaining amount to the franchisee.

In return for the payments, franchisees are permitted to use the Jan–Pro brand and trademarks in its business and are instructed on Jan–Pro's proprietary cleaning methods.

¶ 6 All Lyons' franchisees are independent businesses who carry their own business licenses. The franchise agreement does not explicitly require franchisees to perform any cleaning themselves, and franchisees are required to pay IIA premiums for any employees they decide to hire. The franchise agreement permits franchisees to hire and fire their own subordinates without Lyons' review. Any subordinates must be “qualified and competent,” and franchisees are responsible for training the subordinates. CP at 328.

¶ 7 Lyons enters into cleaning contracts with customers and offers the customers' accounts to one of its franchisees. If a franchisee accepts a cleaning contract from Lyons, the franchisee performs the commercial cleaning services directly for the customers. Franchisees must supply their own equipment and supplies, but Lyons controls where and from whom the supplies and equipment may be obtained. Even after franchisees accept a cleaning contract, the contract remains Lyons' property. Franchisees may also solicit their own contracts without violating the franchise agreement. In the event that a franchisee successfully obtains new business, the contract becomes Lyons' property.

¶ 8 The franchise agreement precludes franchisees from providing commercial cleaning services outside of Lyons' franchise contracts for the entire 10–year duration of the agreement. The franchise agreement also contains a noncompete agreement that prevents franchisees from engaging in commercial cleaning services of any kind for one year following the conclusion of the franchise agreement.

¶ 9 Lyons retains the right to remove a franchisee from a cleaning contract with or without cause, and may terminate franchise agreements for a number of reasons, including tarnishing the Jan–Pro reputation. If a franchise is terminated, Lyons retains the right to purchase all of the franchisee's assets related to the commercial cleaning industry, including items not bearing the Jan–Pro trademark. Lyons must also approve any transfer or sale of the franchise as well as any transfer of interest in the franchise.

B. Procedural history

¶ 10 This case involves a series of administrative and court proceedings dating back to 2010 that all address whether Lyons' franchisees are subject to the IIA.

¶ 11 In 2010, L & I completed an audit of Lyons and determined that all of Lyons' franchisees, except the 18 who employed subordinates, were covered “workers” under RCW 51.08.180

. The audit also found that Lyons substantially controlled its franchisees under RCW 51.08.195(1), and therefore did not meet that provision's exception to coverage. L & I determined that Lyons controlled the methods used by its franchisees, which was partially indicated by its extensive training, and also that Lyons controlled the franchisees' opportunity for profit, given its right to negotiate and its actual ownership of all of the cleaning contracts. The audit concluded that the indefinite nature of the relationship between Lyons and its franchisees suggested an employer-employee relationship. L & I did not collect the $149,583.94 in past-due premiums that Lyons would otherwise have owed because the audit had an educational focus only. The audit required that Lyons in the future comply with all IIA reporting and premium requirements for its covered workers.

¶ 12 Lyons sought agency reconsideration of the audit. In the agency reconsideration, L & I concluded that all of Lyons' franchisees, including those 18 who employed subordinates, were covered workers. L & I also found that Lyons' franchisees failed all six requirements of the RCW 51.08.195

coverage exception. Lyons appealed to the Board, where an administrative law judge determined that none of Lyons' franchisees were workers because they met all six requirements of the RCW 51.08.195 exception. The administrative law judge did not examine that conclusion in light of White. L & I appealed that decision to a three-member panel of the Board, which affirmed the initial agency audit. The board panel concluded that consistent with White, all of the franchisees, except the 18 who employed subordinates, were covered workers under the IIA. The board panel also found Lyons' franchisees met four of the six requirements of RCW 51.08.195

, but determined the franchisees did not meet subsections (1) and (3).

¶ 13 Both L & I and Lyons appealed the board panel's decision to the Pierce County Superior Court. The superior court found that all Lyons' franchisees were covered workers and that the fact that some franchisees employed subordinates when they could have performed the work themselves was insufficient to exempt them from coverage under White. The superior court also found that Lyons exercised significant control and direction over its franchisees and, therefore, did not meet the RCW 51.08.195

exception under subsection (1).

¶ 14 Only Lyons appealed the superior court's decision. Division Two of the Court of Appeals rejected Lyons' argument that the franchise relationship categorically excluded it from IIA coverage. Lyons, 186 Wash.App. at 531–35, 347 P.3d 464

. The Court of Appeals reasoned that the essence of the work performed by Lyons' franchisees under the franchise agreement was the franchisees' personal labor. Id. The Court of Appeals also ruled that under White, only Lyons' franchisees who employed subordinates were exempt from coverage, and that the covered franchisees did not meet the exception found in RCW 51.08.195. Id. at 535, 347 P.3d 464. The Court of Appeals found the franchisees did not meet RCW 51.08.195(3), but did not address whether they met subsection (1). Id. at 537, 347 P.3d 464. The Court of Appeals remanded the case to the Board in order to resolve factual discrepancies as to which franchisees actually employed subordinates. Id. at 538, 347 P.3d 464.

¶ 15 Lyons filed a petition for review, which we granted. Lyons Enters., ...