Dep't of Labor & Indus. of State v. Lyons Enters., Inc., 45033–0–II.

Citation347 P.3d 464,186 Wash.App. 518
Decision Date03 February 2015
Docket NumberNo. 45033–0–II.,45033–0–II.
CourtCourt of Appeals of Washington
PartiesDEPARTMENT OF LABOR AND INDUSTRIES OF the STATE of Washington, Respondent, v. LYONS ENTERPRISES, INC. dba Jan–Pro Cleaning Systems, Appellant.

Ryan P. McBride, Lane Powell PC, Seattle, WA, for Appellant.

Steve Vinyard, Attorney General's Office, Olympia, WA, for Respondent.

Douglas Clayton Berry, Daniel J. Oates, Miller Nash Graham & Dunn LLP, Seattle, WA, Amicus Curiae on behalf of International Franchise Association.

Geoffrey Julian Mars Bridgman, Ogden Murphy Wallace, P.L.L.C., Seattle, WA, Amicus Curiae on behalf of Dba Coverall of Washington Northwest Franchising Inc.Diego Alonso Rondc3n Ichikawa, Washington Supreme Court, Olympia, WA, Rebecca A. Smith, National Employment Law Project, Brian Michael Wright, Causey Law Firm, Seattle, WA, Amicus Curiae on behalf of Service Employees International Union Local 6.

Rebecca A. Smith, National Employment Law Project, Brian Michael Wright, Causey Law Firm, Seattle, WA, Amicus Curiae on behalf of Workers Injury Law and Advocacy Group.

Diego Alonso Rondc3n Ichikawa, Washington Supreme Court, Olympia, WA, Rebecca A. Smith, National Employment Law Project, Brian Michael Wright, Causey Law Firm, Seattle, WA, Amicus Curiae on behalf of National Employment Law Project.

Opinion

JOHANSON, C.J.

¶ 1 Appellant Lyons Enterprises Inc., doing business as Jan–Pro Cleaning Systems (Lyons), appeals from the superior court's partial affirmance and partial reversal of the Board of Industrial Insurance Appeals' (Board) decision and order. Lyons sells janitorial franchises, and the superior court held that Lyons' franchisees were workers for the purposes of the Industrial Insurance Act (IIA), Title 51 RCW, and that Lyons was required to pay IIA premiums for all franchisees. Like the Board; we conclude that Lyons' franchisees without employees are workers covered by the IIA, but those franchisees who have employees do not come within the purview of the IIA. Remand to the Board is appropriate for a factual determination of which franchisees had employees. We do not reach the issue of equitable estoppel, we reject amicus curiae International Franchise Association's (IFA) contracts clause claims, and we deny attorney fees. The superior court is affirmed in part and reversed in part.

FACTS

¶ 2 Lyons is a distributor of Jan–Pro cleaning franchises. Lyons does not characterize itself as a “cleaning” business. Although customers enter into contracts with Lyons to clean their facilities, it is not Lyons that does the cleaning.1 Rather, the cleaning is done by franchisees who have purchased from Lyons the right to participate in the “Jan–Pro System.” Clerk's Papers (CP) at 23.

¶ 3 A franchisee becomes a part of the Jan–Pro System by entering into a contract with a regional distributor such as Lyons. Pursuant to this contract, a franchisee pays a franchise fee up front, a royalty for use of Jan–Pro's brands and methods, and management fees for Lyons' business support services. The royalties total 10 percent of the franchisee's gross billings and the management fees total 5 percent of billings. In practical terms, the more business a franchisee does, the more both the franchisee and Lyons benefit. Finally, the franchisee must enter a noncompete covenant for the duration of the Jan–Pro contract and for one year thereafter.

¶ 4 In return for these fees and commitments, a franchisee is permitted to use the Jan–Pro brand and trademarks in business and is instructed in Jan–Pro's proprietary cleaning procedure. The franchisee is also guaranteed a certain amount of gross billing. Lyons solicits clients, negotiates and enters into cleaning contracts, and bills clients on behalf of its franchisees. Lyons does these acts for the benefit of franchisees who lack experience in administering a business. If a franchisee solicits a customer itself, the customer must sign a contract with Lyons, and the cleaning contract becomes Lyons' property.

¶ 5 All franchisees are organized as independent businesses—they carry their own business licenses and insurance and pay IIA premiums for their own employees if they have them. Franchisees also bear the risk of loss in the event a customer fails to pay. A franchisee is free to reject a cleaning contract, in which case Lyons will provide the franchisee with a replacement account in order to maintain the guaranteed amount of gross billing. Lyons may remove a franchisee from a cleaning contract, but if Lyons does so for a reason other than franchisee misconduct,2 then Lyons must provide the franchisee with a replacement account. A franchisee can only be terminated from the Jan–Pro System for cause.

¶ 6 Before they can do any work, new franchisees are required to complete 30 hours of training over 5 weeks. The training includes cleaning techniques and safety procedures as well as how to run a business and deal with customers. Franchisees must also comply with a 422–page training manual on Jan–Pro cleaning techniques, a 200–page safety manual, and a 100–page policies and procedures manual. I order to evaluate franchisees' compliance, Lyons periodically audits its customers. But Lyons does not supervise its franchisees during the actual cleaning nor does it send its own personnel to the job site.

¶ 7 Franchisees can hire and fire their own subordinates with no input from Lyons, although the contract specifies that the franchisee's employees must be “qualified and competent.” CP at 328. Franchisees are responsible for training their own subordinates. About 80 percent of Lyons' franchisees receive assistance from an employee or spouse. The contract is silent as to whether franchisees are required to perform any cleaning work themselves.3

¶ 8 Finally, franchisees are subject to various conditions in the course of their relationship with Lyons. Any advertising the franchisee does must be' approved by Lyons. The franchisee must have Lyons' permission to transfer or sell the franchise. The franchisee supplies its own equipment and materials, but those must be obtained “solely from manufacturers and suppliers, and in accordance with specifications, that [Jan–Pro] authorizes in writing.” CP at 328.

PROCEDURAL HISTORY

¶ 9 In 2005, Labor & Industries (L & I) audited Lyons and assessed IIA premiums for two of its franchisees. L & I reasoned that these two franchisees “did not meet the criteria for independent contractor under RCW 51–[08]–180 and 51–[08]–195 (CP at 876) because they did not have a valid UBI,4 and as a result, they were workers for IIA purposes. Lyons understood this audit to mean that most of its franchisees were not covered workers and were not subject to IIA premiums. In reliance on this understanding, Lyons expanded its territory and entered into numerous additional franchise agreements.

¶ 10 In 2010, L & I audited Lyons again. This second audit found that 18 franchisees were not workers because they employed workers of their own. But the remaining franchisees were covered workers and did not qualify for the exception described in RCW 51.08.195. L & I reached this conclusion because these franchisees were not “free from direction and control.” CP at 1640. The audit found that Lyons had the right to control how work results were achieved, noting that “exempt independent contractors ordinarily use their own methods. [Lyons'] extensive training program signifies the opposite.” CP at 1639. The audit further found that because Lyons negotiated the cleaning contracts, it had “control over [franchisees'] opportunity for profit or loss.” CP at 1640. The audit also noted that Lyons owned the customer accounts and charged the franchisees various fees. Finally, the audit found that “Lyons Enterprises' business arrangements with the individuals indicate the expectation that the relationship will continue indefinitely, rather than for a specific project or period. This is generally considered evidence that the intent was to create an employer-worker relationship.” CP at 1640. Ordinarily, Lyons would have owed $149,583.94 in back premiums. But the 2010 audit was “completed with an educational focus only” and merely required Lyons to begin reporting and paying IIA premiums on its covered workers going forward. CP at 1641 (capitalization omitted).

¶ 11 Lyons requested reconsideration of the 2010 audit. Jerold Billings, a litigation specialist for L & I, determined that Lyons was responsible for IIA premiums for all of its franchisees, including the 18 who had their own workers. At an administrative law hearing, Billings testified that L & I had not changed its position since the 2005 audit. Rather, the auditor “made a mistake” and “didn't look at the franchise fully.” CP at 2255–56.

¶ 12 Lyons appealed to the Board. After hearing testimony, Industrial Appeals Judge Wayne B. Lucia issued a proposed decision and order concluding that none of Lyons' franchisees were covered workers.

¶ 13 L & I appealed to a three-member panel of the Board. The Board subsequently issued a final decision and order adopting the position of the 2010 audit—that those franchisees with their own workers were exempt, but the remaining franchisees were covered workers.

¶ 14 Both Lyons and L & I appealed the Board's decision, and the administrative law review was consolidated in the Pierce County Superior Court. The superior court held that all of Lyons' franchisees were covered workers. Accordingly, it affirmed the Board in part and reversed it in part. Lyons timely appealed the superior court order.

ANALYSIS

¶ 15 The IIA requires employers to report and pay workers' compensation premiums for all of their workers. Ch. 51.16 RCW. Therefore, the dispositive question in this case is whether Lyons' franchisees are “workers,” as that term is defined under the IIA.5 To answer that question, we rely on two subsections: RCW 51.08.180, which defines the term “worker,” and RCW 51.08.195, which contains exceptions...

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