Dep't of Labor & Indus. v. Lyons Enters., Inc. ( 2016 )

IN THE SUPREME COURT OF THE STATE OF WASHINGTON
DEPARTMENT OF LABOR )
AND INDUSTRIES OF THE )
STATE OF WASHINGTON, ) No. 91610-1
)
Respondent, ) ENBANC
)
v. ) Filed MAY 1 9 20~6
)
LYONS ENTERPRISES, INC. )
d/b/a JAN-PRO CLEANING )
SYSTEMS, )
)
Petitioner. )
-------------- )
FAIRHURST, J.-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
Dep 't of Labor & Indus. v. Lyons Enters., Inc., No. 91610-1
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 ofLabor & 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.
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 ofLabor & Indus. v. Lyons Enters., Inc., 186
Wn. App. 518,543,347 P.3d464, 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.
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.
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I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
A. Factual background
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.
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.
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
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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.
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.
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.
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
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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
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.
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.
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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 ).
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).
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Dep't of Labor & Indus. v. Lyons Enters., Inc., No. 91610-1
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. 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. I d. at 53 5. 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. 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.
Lyons filed a petition for review, which we granted. Lyons Enters., 183 Wash. 2d
1017.
II. ISSUES
A. Can franchises be subject to the IIA?
B. Are Lyons' franchisees who do not hire subordinates "workers"
pursuant to the IIA?
C. If Lyons' franchisees are "workers," are they nevertheless exempt from
coverage under White or RCW 51.08.195?
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Dep 't of Labor & Indus. v. Lyons Enters., Inc., No. 91610-1
III. ANALYSIS
The primary issue in this appeal is whether Lyons' franchisees who did not
employ subordinates are "workers" as that term is defined under RCW 51 .08.180 of
the IIA. To properly address this issue, we first evaluate whether the IIA is applicable
to franchises. This is necessary both because the IIA's passage predated the
expansion of the franchise business model and because franchises are already subject
to a strict regulatory scheme under the Franchise Investment Protection Act (FIP A),
chapter 19.100 RCW. Because we find the IIA is applicable to franchises, we next
address whether Lyons' franchisees meet the definition of "worker" and whether
they may be subject to exception under our holding in White or under RCW
51.08.195. 1
In reviewing a board decision under the IIA, the superior court considers the
issues de novo, relying on the certified board record. Watson v. Dep 't of Labor &
Indus., 133 Wash. App. 903, 909, 138 P.3d 177 (2006). The superior court's ruling is
subject to the ordinary civil appeal rules. See RCW 51.52.140; Ramo v. Dep't of
Labor & Indus., 92 Wash. App. 348, 353, 962 P.2d 844 (1998).
1
Whether the franchisees in the current case were actually employees is not at issue in this
case and not relevant because certain independent contractors can be "workers." Based on the
record, none of the franchisees consented to an employment relationship. An employment
relationship requires both a right of control and the employee's consent to the employment
relationship. See Judy v. Hanford Envtl. Health Found., 106 Wash. App. 26, 35,22 P.3d 810 (2001).
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Dep 't of Labor & Indus. v. Lyons Enters., Inc., No. 91610-1
A. Franchises can be subject to the IIA because the purposes underlying the IIA
and FIP A support applying the IIA to franchises
Like many other issues surrounding FIP A, nothing in chapter 19.100 RCW
addresses the applicability of the IIA to franchise relationships. See Douglas C.
Berry et al., State Regulation ofFranchising: The Washington Experience Revisited,
32 SEATTLE U. L. REv. 811, 812 (2009) (describing the "thundering silence that has
persisted on a wide variety of FIP A issues"). Still, Lyons maintains FIP A should
provide exclusive coverage over FIP A regulated franchises. We disagree. The
purposes of both FIP A and the IIA confirm that the IIA should apply to franchises.
1. FIPA
When the legislature enacted FIPA, it created a comprehensive scheme for
regulating franchising in Washington, and did so with the aim of protecting
franchisees. See E. Wind Express, Inc. v. Airborne Freight Corp., 95 Wash. App. 98,
102, 974 P.2d 369 (1999) ("Our Legislature enacted ... FIPA ... to curb franchisor
sales abuses and unfair competitive practices." (citing Morris v. Int 'l Yogurt, 107
Wash. 2d 314, 317-18, 729 P.2d 33 (1986))); see also Berry, supra, at 817. "The
provisions of FIP A reflect a fundamental policy of this state to protect its citizens
from oppressive practices historically associated with the sale of franchises." Rutter
v. BX of Tri-Cities, Inc., 60 Wash. App. 743, 748, 806 P.2d 1266 (1991). As we
explained shortly after the implementation ofFIPA:
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"The franchisor normally occupies an overwhelmingly stronger
bargaining position and drafts the franchise agreement so as to
maximize his power to control the franchisee. Franchisors have used
this power to terminate franchises arbitrarily, to coerce franchisees
under threat of termination, and to force franchisees to purchase
supplies from the franchisor or approved suppliers at unreasonable
prices, to carry excessive inventories, to operate long, unprofitable
hours, and to employ other unprofitable practices."
Coast to Coast Stores, Inc. v. Gruschus, 100 Wash. 2d 147, 150, 667 P.2d 619 (1983)
(quoting Donald S. Chisum, State Regulation of Franchising: The Washington
Experience, 48 WASI-L L. REV. 291,297-98 (1973)). We have previously recognized
that it was in response to these concerns that the legislature included in FIP A a
franchisee "bill of rights." See Corp v. Atl.-Richjield Co., 122 Wash. 2d 574, 580, 860
P.2d 1015 (1993) (citing RCW 19.100.180; Coast to Coast, 100 Wash. 2d at 150).
Although subsequent commentary has questioned the validity of these fears,
especially in light of the sophisticated franchisees operating today, see Berry, supra,
at 873, the legislature enacted FIP A with the purpose of protecting franchisees, and
it is through that lens that we continue to view its provisions.
2. IIA
We turn now to the IIA and its purpose, as intended by the legislature, to
determine whether the IIA should be interpreted to apply to franchise relationships.
The legislature created the workers' compensation system in 1911 through the
passage of the IIA. LAWS OF 1911, ch. 74; Walston v. Boeing Co., 181 Wash. 2d 391,
396, 334 P.3d 519 (2014) (citing Birklid v. Boeing Co., 127 Wash. 2d 853, 859, 904
10
Dep 't of Labor & Indus. v. Lyons Enters., Inc., No. 91610-1
P.2d 278 (1995)). The IIA was a '"grand compromise'" that granted immunity to
employers from civil suits initiated by their workers and provided workers with "'a
swift, no-fault compensation system for injuries on the job."' Walston, 181 Wash. 2d
at 396 (quoting Birklid, 127 Wash. 2d at 859).
Although the initial passage applied only to extrahazardous work, "in 1971
the legislature amended the IIA to encompass 'all employments . . . within the
legislative jurisdiction of the state."' Doty v. Town ofSouth Prairie, 155 Wash. 2d 527,
531, 120 P.3d 941 (2005) (emphasis added) (alteration in original) (quoting LAWS
OF 1971, 1st Ex. Sess., ch. 289, §§ 1-2)). "The IIA is broad in scope and contains a
mandate of liberal construction 'for the purpose of reducing to a minimum the
suffering and economic loss arising from injuries and/or death occurring in the
course of employment."' I d. (quoting RCW 51.12.01 0). The liberal construction of
the IIA necessitates that all doubts be resolved in favor of coverage. Id. at 532.
Further, the "guiding principle" when interpreting provisions of the IIA is that it is
a remedial statute that is "to be liberally construed in order to achieve its purpose of
providing compensation to all covered employees injured in their employment, with
doubts resolved in favor of the worker." Dennis v. Dep 't of Labor & Indus., 109
Wn.2d 467,470,745 P.2d 1295 (1987) (citing RCW 51.12.010; Sacred Heart Med.
Ctr. v. Carrado, 92 Wn.2d 631,635,600 P.2d 1015 (1979); Lightle v. Dep 't ofLabor
& Indus., 68 Wash. 2d 507, 510, 413 P.2d 814 (1966); Wilber v. Dep't of Labor &
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Dep'tofLabor & Indus. v. Lyons Enters., Inc., No. 91610-1
Indus., 61 Wash. 2d 439, 446, 378 P.2d 684 (1963); State ex rel. Crabb v. Olinger, 196
Wash. 308,311,82 P.2d 865 (1938); Gaines v. Dep 't ofLabor & Indus., 1 Wash. App.
547, 552, 463 P.2d 269 (1969)).
In keeping with the remedial nature of the IIA and the requirements that it be
construed liberally to cover all employment within the jurisdiction of the state, as
well as FIPA's aim of protecting franchisees, we hold that the IIA is applicable to
franchises provided the franchisees meet the IIA's definition of a covered "worker." 2
B. Lyons' franchisees who do not hire subordinates meet the IIA's definition of
"worker"
A finding that Lyons' franchisees are "workers" is a prerequisite to the
imposition of IIA premiums. See RCW 51.16.060. Because we construe the IIA to
cover franchises, we next resolve whether Lyons' franchisees meet the IIA's
definition of "worker." We hold that the essence of Lyons' franchise agreement is
the franchisees' personal labor and the franchisees are therefore "workers" as that
term is defined in RCW 51.08.180.
The IIA defines "worker" as
every person in this state who is engaged in the employment of an
employer under this title, whether by way of manual labor or otherwise
in the course of his or her employment; also every person in this state
who is engaged in the employment of or who is working under an
independent contract, the essence of which is his or her personal labor
2
Moreover, there is no support in either the IIA or FIPA for Lyons' argument that the IIA
is inapplicable because franchises are governed solely by FIP A. As explained above, FIPA was
enacted with the purpose of protecting the franchisee and the IIA' s extension to FIPA regulated
franchises would achieve this objective when the franchisee can also be classified as a "worker."
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for an employer under this title, whether by way of manual labor or
otherwise, in the course of his or her employment.
RCW 51.08.180 (emphasis added). Lyons does not dispute that its franchisees are
independent contractors. To be sure, the franchise agreement between Lyons and its
franchisees describes the franchisees as independent contractors. Because the IIA
includes independent contractors within its definition of "worker," the only
remaining inquiry is whether the essence of the independent contract between Lyons
and its franchisees is the franchisees' personal labor.
For our purposes, the question then becomes how to discern the "essence" of
a contract that will bring certain independent contractors within the gambit of the
IIA. To establish whether the essence of a contract is personal labor, "we look to the
contract, the work to be done, the situation of the parties, and other attendant
circumstances." Lloyd's of Yakima Floor Ctr. v. Dep't of Labor & Indus., 33 Wn.
App. 745, 749, 662 P.2d 391 (1982) (citing Cook v. Dep't of Labor & Indus., 46
Wash. 2d 475, 476, 282 P.2d 265 (1955)). "Essence," as we have previously defined it,
refers to "the 'gist or substance, the vital sine qua non, the very heart and soul"' of
the contract between the independent contractor and the employer. Id. at 751
(quoting Haller v. Dep't of Labor & Indus., 13 Wash. 2d 164, 168, 124 P.2d 559
(1942)). When considering whether a contract's essence is personal labor, "[w]e
focus on the realities of the situation rather than the technical requirements of the
test." B&R Sales, Inc. v. Dep't ofLabor & Indus., 186 Wn. App. 367,377,344 P.3d
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I
741 (2015) (citing Dana's Housekeeping, Inc. v. Dep 't of Labor & Indus., 76 Wn.
App. 600, 608, 886 P.2d 1147 (1995)). However, in White we held personal labor is
not the essence of a contract when an independent contractor
(a) . . . must of necessity own or supply machinery or equipment (as
distinguished from the usual hand tools) to perform the contract, or (b)
... obviously could not perform the contract without assistance, or (c)
... of necessity or choice employs others to do all or part of the work
he has contracted to perform.
48 Wash. 2d at 474.
Lyons contends the essence of the relationship between it and its franchisees
is the bilateral contract between two independent businesses, not the franchisees'
personal labor. Although this is our first time to address such an argument in the
franchise context, the Court of Appeals considered similar arguments in prior cases
when the parties were in a lessee-lessor relationship and in a business referral
relationship.
In Department ofLabor & Industries v. Tacoma Yellow Cab Co., 31 Wash. App.
117, 118, 639 P .2d 843 (1982), individuals leased taxicabs from employers on a day-
to-day basis. Despite the fact that the individuals and the taxicab companies used the
lease agreement terminology to describe their business arrangement, L&I assessed
IIA premiums against the taxicab companies for the individuals leasing taxicabs. I d.
Division Two of the Court of Appeals acknowledged that the taxicab drivers worked
under and pursuant to an independent contract with the taxicab companies; thus, like
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Dep'tofLabor & Indus. v. Lyons Enters., Inc., No. 91610-1
the present case, the dispositive determination for coverage was the essence of the
independent contracts. Id. at 123. Under the independent contracts, the drivers were
free to operate the taxicabs in any legally permissible fashion, provided the taxicab
"'not be operated by any person except by the Lessee or his regular employees. And
such employees shall be duly qualified and licensed to drive and over the age of 25
years."' Id. (quoting lease). Use of the taxicabs was based on a flat fee and mileage
agreement that the companies asserted provided no basis for an employer-employee
relationship that would necessitate paying IIA premiums. Id. at 123-24. The Court
of Appeals reasoned that the taxicab companies' arguments ignored the realities of
the relationship between the parties. I d. at 124. The realities of the taxicab drivers'
situation was "simply that the essence of the independent lease contract [was] to
provide a method to place taxis and drivers on the city streets of Tacoma to carry
passengers at rates which are established by local ordinances." Id. The Court of
Appeals therefore found that the function of the lease drivers was no different from
the actual employees of the taxicab companies and that the drivers "contribute[ d]
nothing to the contract except their personal labor." Id. As such, even though neither
the individuals nor the taxicab companies intended to create an independent
contractor relationship necessitating the payment of workers' compensation
premiums, L&I's assessment of premiums against the taxicab companies was proper
based on the realities of the relationship.
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In Dana's, 76 Wash. App. 600, Division One of the Court of Appeals came to a
similar conclusion. Dana's was a business that contracted with housecleaners to
clean private homes. Id. at 602. Dana's issued all job assignments and made all
arrangements for the housecleaning except transportation. I d. Dana's considered the
homeowners its own clients, and the housecleaners agreed not to solicit any of the
homeowners for 90 days following termination of their relationship with Dana's. Id.
at 603. All of the housecleaners signed contracts with Dana's designating themselves
as independent contractors. Id. at 602.
Despite the independent contractor designation, L&I assessed IIA premiums
against Dana's for all of its housecleaners. Id. On appeal, the Court of Appeals stated
that in assessing whether the housecleaners were workers, it had to decide (1)
whether the housecleaners were working under an independent contract, (2) whether
the essence of the contract was the housecleaners' personal labor, and (3) whether
the personal labor was for Dana's. Id. at 607.
Dana's did not dispute that the housecleaners were working under an
independent contract. However, Dana's attempted to argue that the essence of its
relationship with the housecleaners was not personal labor but rather "'an agreement
to accept referrals and share a fee,"' and that any personal labor was for the benefit
of the homeowners, not Dana's. Id. Division One disagreed in both regards. The
court explained that the "essence" is determined by the work performed under the
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Dep 't ofLabor & Indus. v. Lyons Enters., Inc., No. 91610-1
independent contract, not the parties' characterization of their relationship, and that
the essence inquiry focuses on the realities of the situation, not technical
requirements. Id. at 607-08. Considering that the housecleaners had no specialized
equipment, worked without assistance, and were precluded from hiring others, the
"essence" of the independent contract was the housecleaners' personal labor, not
solicitation of housecleaning duties from Dana's. Id. at 608. Next, although Dana's
attempted to argue that the housecleaners' labor was for the homeowners, not
Dana's, the court concluded that personal labor for an employer includes both direct
labor and labor for an employer's benefit. !d. (citing Cascade Nursing Servs., Ltd. v.
Emp't Sec. Dep't, 71 Wash. App. 23, 33, 856 P.2d 421 (1993)). The realities of the
situation, as Division One viewed them, demonstrated that the housecleaners' labor
was beneficial to Dana's, as Dana's received up to 48 percent of the cleaning fees.
Id. at 608-09. The fact that homeowners received the cleaning benefit was not
enough to exclude the housecleaners from IIA coverage. I d. at 608 (citing Lloyd's,
33 Wash. App. at 752).
Here, Lyons' argument similarly ignores the reality of the relationship it
shares with its franchisees and instead relies on its characterization of the
relationship. The courts in both Dana's and Tacoma Yellow Cab rejected this
characterization argument. We now do the same.
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While Lyons' franchisees receive corollary benefits from the franchise
relationship, the essence of the contracts between Lyons and its franchisees is the
labor required to clean its customers' buildings. Lyons nevertheless maintains that
the customers receive the personal labor of the franchisees. However, as the Dana's
court concluded, labor for an employer can include both direct labor and labor for
an employer's benefit. Lyons receives 15 percent of every cleaning contract. Lyons
also exercises significant control over both the methods utilized by franchisees and
the cleaning contracts themselves since Lyons retains ownership over every contract.
Like Dana's, the evidence in the present case indicates that the relationship remains
beneficial to Lyons, and the cleaning benefits received by Lyons' customers are not
enough to exclude the franchisees from IIA coverage. We therefore find that Lyons'
franchisees are "workers" under the IIA.
C. Lyons' franchisees are not exempt under White or RCW 51.08.195
Although we conclude Lyons' franchisees are "workers," they may
nevertheless be excluded from IIA coverage if they meet one of the exceptions
announced in White or the six-part exception articulated in RCW 51.08.195.
1. Only Lyons' franchisees who actually employ subordinates are
exempted from IIA coverage under White
As noted above, in White we set forth three situations in which the essence of
a contract is not personal labor: (1) when the independent contractor must of
necessity own or supply machinery to perform the contract, or (2) the independent
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Dep 't of Labor & Indus. v. Lyons Enters., Inc., No. 91610-1
contractor obviously could not perform the contract without assistance, or (3) the
independent contractor of necessity or choice employs others to do all or part of the
work he has been contracted to perform. 48 Wash. 2d at 474.
Lyons does not assert that its franchisees meet either the first or second White
exclusions. Indeed, the factual findings of the Board evidence that Lyons' contract
completion requires neither specialized tools nor assistance from franchisee
subordinates. Still, Lyons maintains that because the franchise agreement
contemplates that franchisees may hire subordinates, it meets White's third prong
and is therefore outside of the IIA's definition of"worker." In Lyons' view, the mere
contemplation that another may perform the labor is sufficient to make the labor
nonpersonal. We disagree.
The fact that a franchisee could hire a subordinate is insufficient to exempt an
employer from IIA coverage. As the Court of Appeals explained, this court has
already rejected such an argument. Lyons, 186 Wash. App. at 533. In White, we
considered two of our prior holdings in which we held that labor that may be done
by another is not "personal" as the IIA intended. 48 Wash. 2d at 4 72-73 (discussing
Crall v. Dep 't ofLabor & Indus., 45 Wash. 2d 497, 275 P.2d 903 (1954), overruled by
White, 48 Wn.2d470, and Cookv. Dep'tofLabor & Indus., 46 Wash. 2d 475,282 P.2d
265, 266 (1955), overruled by White, 48 Wash. 2d 470). There, we overruled Crall and
Cook, finding that their language was too broad and that when passing the IIA, the
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Dep't of Labor & Indus. v. Lyons Enters., Inc., No. 91610-1
legislature had something more in mind than "protection of independent contractors
in those extremely rare cases in which the party for whom the work is done requires
the personal services of the independent contractor and is unwilling that any part of
the work be done by someone else." Id. at 474. Our reasoning in White was based
on the notion that actual employment of another must occur to negate a finding that
the independent contractor is a worker. The hypothetical ability to hire subordinates
has never been sufficient to preclude coverage under the IIA and is likewise
inadequate here.
We therefore reject Lyons' argument and hold that only those franchisees of
Lyons who actually employ subordinates are exempt from IIA coverage. 3
2. Lyons 'franchisees do not meet the RCW 51.08.195 exception
The IIA is construed broadly in favor of coverage in order to achieve its
objective of protecting all workers. But, even an individual who meets RCW
51.08.180' s definition of "worker" will be excluded from IIA coverage if she meets
all six of the requirements articulated in RCW 51.08.195. 4 Malang v. Dep 't ofLabor
& Indus., 139 Wash. App. 677, 689, 162 P.3d 450 (2007).
The parties do not appear to dispute that the Lyons' franchisees meet
subsections (2), (4), (5), and (6) ofRCW 51.08.195. Instead, Lyons andL&I disagree
3
As the Court of Appeals explained, the factual record remains unclear as to which of
Lyons' franchisees actually employ subordinates. This is an issue properly addressed on remand.
4
RCW 51.08.195 provides:
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Dep 't of Labor & Indus. v. Lyons Enters., Inc., No. 91610-1
as to the applicability of subsections (1) and (3). Although Lyons maintains RCW
51.08.195 exempts its franchisees from IIA coverage, we hold its franchisees do not
meet RCW 51.08.195(3). Failure to meet any subsection precludes exception. Id.
Because the Court of Appeals decided this issue on RCW 51.08.195(3), we
first address that subsection. In doing so, we conclude Lyons has not shown that its
As an exception to the definition of "employer" under RCW 51.08.070 and the
definition of"worker" under RCW 51.08.180, services performed by an individual
for remuneration shall not constitute employment subject to this title if it is shown
that:
(1) The individual has been and will continue to be free from control or
direction over the performance of the service, both under the contract of service
and in fact; and
(2) The service is either outside the usual course of business for which the
service is performed, or the service is performed outside all of the places of business
of the enterprise for which the service is performed, or the individual is responsible,
both under the contract and in fact, for the costs of the principal place of business
from which the service is performed; and
(3) The individual is customarily engaged in an independently established
trade, occupation, profession, or business, of the same nature as that involved in the
contract of service, or the individual has a principal place of business for the
business the individual is conducting that is eligible for a business deduction for
federal income tax purposes; and
(4) On the effective date of the contract of service, the individual is
responsible for filing at the next applicable filing period, both under the contract of
service and in fact, a schedule of expenses with the internal revenue service for the
type of business the individual is conducting; and
(5) On the effective date of the contract of service, or within a reasonable
period after the effective date of the contract, the individual has established an
account with the department of revenue, and other state agencies as required by the
particular case, for the business the individual is conducting for the payment of all
state taxes normally paid by employers and businesses and has registered for and
received a unified business identifier number from the state of Washington; and
(6) On the effective date of the contract of service, the individual is
maintaining a separate set of books or records that reflect all items of income and
expenses of the business which the individual is conducting.
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Dep'tofLabor & Indus. v. Lyons Enters., Inc., No. 91610-1
franchisees' businesses are customarily engaged in an independently established
business as RCW 51.08.195(3) requires.
In order to satisfy RCW 51.08.195(3), an individual must be
customarily engaged in an independently established trade, occupation,
profession, or business, of the same nature as that involved in the
contract of service, or the individual has a principal place of business
for the business the individual is conducting that is eligible for a
business deduction for federal income tax purposes.
Lyons does not argue that its franchisees have independent places of business, so we
need decide only whether the franchisees are customarily engaged in an
independently established business. The Court of Appeals found that Lyons'
franchisees were not exempt because their businesses were "intimately tied to their
relationship with Lyons." Lyons, 186 Wash. App. at 537. The Court of Appeals did
not err in making that determination.
A business is "'independently established"' if the individual customarily
engages in it and if it is an enterprise created and existing separate and apart from
the relationship with a particular employer, 'such that the enterprise will survive the
termination of that relationship. In re All-State Constr. Co., 70 Wash. 2d 657, 666, 425
P.2d 16 (1967).
Most of Lyons' franchisees were not in the commercial cleaning business
prior to the purchase of their franchise, nor had they previously owned businesses.
The franchisees rely on Lyons to solicit business and to complete billing, and Lyons
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Dep'tofLabor & Indus. v. Lyons Enters., Inc., No. 91610-1
owns all of the cleaning contracts. Though we have previously noted that the
franchise is conceptually distinct from the franchisee's business, see Coast to Coast,
100 Wash. 2d at 152, the franchisees' businesses in this case rely on Lyons for creation
and operation of the franchise and cease to have any legitimate value at the close of
the franchise agreement. Should a franchise be terminated early, franchisees are
precluded from operating their businesses for the entire duration of the 10-year
franchise agreement and for a 1-year period after the end of the franchise agreement
pursuant to the mandatory noncompete clause. This noncompete clause is the
antithesis of independence. As such, we conclude Lyons' franchisees' businesses do
not exist separate and apart from the relationship with Lyons and therefore are not
exempt under RCW 51.08.195(3). Because Lyons' franchisees do not meet
subsection (3) ofRCW 51.08.195, we need not address the remaining provisions.
See Malang, 139 Wash. App. at 689. 5
5
Lyons also claims that its franchisees are not workers because the IIA excludes sole
proprietors, partners, and corporate officers. Lyons first raised this argument at the Court of
Appeals to assert that treating franchisees as independent business owners was consistent with the
legislature's policy of excluding certain business owners from the IIA. This argument is not
properly before us. B&R, 186 Wash. App. at 381 (arguments not raised before the Board are waived
on appeal).
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Dep 't of Labor & Indus. v. Lyons Enters., Inc., No. 91610-1
IV. CONCLUSION
We hold that Lyons' franchisees who do not employ subordinates are
"workers" under the IIA. We remand to the Board to factually determine which
franchisees employ, and which do not employ, subordinates to accurately assess
workers' compensation premiums against Lyons.
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Dep't ofLabor & Indus. v. Lyons Enter., Inc., No. 91610-1
WE CONCUR:
25