Franchisees May Be Employees for Unemployment Insurance Purposes.

Issue Preclusion in Administrative Law.

Employment Dept. v. National Maintenance Contractors of Oregon, Inc., --- P.3d ----, (Or.App.) (March 19, 2009)

National Maintenance Contractors of Oregon, Inc. (NMC) franchisees-janitors performed janitorial services at buildings owned by third parties. The question was whether the were NMC's employees for purposes of unemployment insurance taxes.

NMC is a janitorial franchisor that enters into agreements with building owners to provide janitorial services and informs the owners that the services will be provided by its franchisees. Although NMC often enters into a contract for an entire building, it generally does not assign the building to one franchisee but instead splits identifiable parts of the building among various franchisees.

The cost of an NMC franchise is determined by the volume of monthly billing for the accounts that NMC assigns to the franchisee. NMC does not guarantee that the franchisee will receive a specific account, and all accounts serviced under the franchise must be serviced pursuant to an agreement between the building owner and NMC. Franchisees are not permitted to enter into direct contractual relationships with the building owners-a prohibition that continues for 12 months after the termination of a franchise.

All franchisees are required to sign a written franchise agreement, and each agreement contains essentially the same terms. Under the agreement, it is contemplated that building owners will pay NMC directly for the janitorial services. NMC then deducts a royalty, an “office management fee,” and a liability insurance premium. If a franchisee obtains an account for NMC, the franchisee can pay a reduced royalty and office management fee. After deducting its fees, NMC twice per month forwards the balance of the building owner's payment to the franchisee. The franchise agreement provides that any interest earned on the money received from building owners belongs to NMC. Nothing in the franchise agreement requires NMC to pay a franchisee if a building owner fails to pay for services.

Under the franchise agreement, NMC must replace lost accounts, or reductions in monthly billings on those accounts, during the first year of the franchise agreement. The franchisee can extend that guarantee by paying a higher royalty fee. The franchise agreement expires on termination of the franchisee's accounts or five years from the date of the agreement. The franchisee has the right to renew the agreement subject to certain conditions, including payment of a renewal fee.

The franchise agreement also allows the franchisee to sell, transfer, or assign its franchise, subject to NMC's approval. NMC retains the right of first refusal, which allows it to purchase the franchise from the franchisee on the same terms offered to the prospective buyer. If NMC finds a buyer for the franchise, the selling franchisee must pay NMC 20 percent of the transfer price; if the selling franchisee finds the buyer, the selling franchisee must pay NMC 10 percent of the transfer price.

NMC provides office management services, including billing, collection, inspection reports, record maintenance, and training and advice. NMC must provide initial training to a franchisee and any of the franchisee's employees at no cost within 30 days after signing the agreement. If the franchisee hires new employees after that time, those new employees must complete a training program with NMC (at a cost of $150) or the franchisee must demonstrate to NMC that the employee has received adequate substitute training. A franchisee employee who has not completed satisfactory training is not permitted to service NMC accounts. NMC also provides liability insurance to its franchisees. NMC requires franchisees to accept its office management services and liability insurance.

NMC provides franchisees with a list of “required equipment, materials, and supplies” needed to service accounts, as well as a “list of such items by brand name or type that meet [NMC's] quality standards * * *.” The franchisee, in turn, must purchase and maintain the equipment and supplies as specified. If a franchisee wishes to use other types of equipment or supplies, the franchisee must provide a list of those items to NMC before the franchisee receives initial training. NMC must approve the use of substitute items. NMC also provides a list of appropriate dress for servicing accounts.

Pursuant to the agreement, franchisees have an obligation to “maintain NMC's image.” They must secure doors and exits after leaving the premises of an account, and they must “abide by all of the terms and conditions of [the franchise agreement] and [NMC's] manuals and oral or written directives and instructions.” The franchise agreement also lists 17 specific acts of default. In the event of such a default, NMC has the right to assign the accounts to another franchisee, terminate the franchise agreement, suspend the franchisee for up to six months, and charge the franchisee for the cost of any cleanup caused by the act of default.

On a number of occasions during the past 20 years, various state and federal agencies have issued decisions concerning the nature of the relationship between NMC (or its predecessor, a Washington corporation) and its franchisees. In 1985, a referee for the Oregon Employment Division issued a decision concluding that franchisees of Lyle Graddon (NMC's founder and president) and NACOR, doing business as National Maintenance Contractors of Oregon, were “not in a relationship of employer-employee or a status that could be construed to be ‘employment’ as defined by ORS 657.030.”

Oregon employers must pay unemployment insurance taxes into the Unemployment Compensation Trust Fund “on all wages paid for services.” ORS 657.505(2). The term “wages” is defined in ORS 657.105(1) as “all remuneration for employment, including the cash value, as determined by the Director of the Employment Department under the regulations of the director, of all remuneration paid in any medium other than cash.” The term “employment,” “unless the context requires otherwise, and subject to [certain statutory exclusions],” means “service for an employer * * * performed for remuneration or under any contract of hire, written or oral, express or implied.” ORS 657.030(1)

If an individual provides services to an employer for remuneration, the burden is on the employer to demonstrate that the service comes within an enumerated exception to the definition of employment, such as the “independent contractor” exclusion in ORS 657.040(1). See ORS 657.030(3), ORS 657.040- 657.094 (setting forth various exceptions to the definition of “employment”).

The Supreme Court has specifically identified the general legislative intent underlying ORS 657.030(1): “[T]he legislature did not intend to incorporate the common law test for determining the master-servant relationship. Rather, the test is to be found by looking at the purpose of the [Unemployment Insurance] Act.” Kirkpatrick v. Peet, 247 Or 204, 212, 428 P.2d 405 (1967) (omitted). That purpose, the court explained, “is served only if the Act is construed broadly enough to include persons who, although independent contractors according to the common law test, are peculiarly subjected to the hazard of unemployment because of the nature of their occupation.” Thus, as a policy matter, the legislature has elected to define “employment” broadly and then has carved out specific, enumerated exceptions to that definition in the case of particular industries or circumstances. See, e.g., ORS 657.030(3); ORS 657.040-657.094.

The Court of Appeals held the above terms of the franchise agreement, coupled with the terms of the building service contracts, provide that the building owners do not pay franchisees for janitorial services; rather, the building owners pay NMC for those services, and NMC then pays the franchisees remuneration in exchange for fulfilling NMC's contractual obligations. The arrangement, albeit a product of a “franchise agreement,” is functionally equivalent to a subcontract, whereby remuneration flows from building owner to janitorial contractor and from janitorial contractor to janitorial subcontractor. As subcontractors, the franchisees perform services for NMC which had a contractual obligation to the building owners.

Issue Preclusion: In its cross-assignment of error, NMC contends that the ALJ erred in failing to conclude that the department's arguments under ORS 657 .030 were precluded by a the 1985 prior administrative decision

For issue preclusion to apply, the following requirements must be met: (1) the issue in the two proceedings must be identical; (2) the issue must have actually been litigated and have been essential to a final decision on the merits in the prior proceeding; (3) the party sought to be precluded must have had a full and fair opportunity to be heard on the issue; (4) the party sought to be precluded must have been a party or in privity with a party in the prior proceeding; and (5) the prior proceeding must have been the type of proceeding to which courts give preclusive effect. Id. at 104. As the party asserting issue preclusion, NMC had the burden of proving the first four of those elements. Barackman v. Anderson, 214 Or.App. 660, 66-67, 167 P3d 994 (2007), rev den, 344 Or 401 (2008) (describing the shifting burdens concerning issue preclusion).

The 1985 proceeding involved different franchisees, under a different NMC corporate structure. Therefore there was no preclusion.