RENDERED: AUGUST 18, 2022 TO BE PUBLISHED
Supreme Court of Kentucky 2021-SC-0089-DG
CONSTANCE MOUANDA APPELLANT
ON REVIEW FROM COURT OF APPEALS V. NO. 2019-CA-1594 JEFFERSON CIRCUIT COURT NO. 19-CI-000283
JANI-KING INTERNATIONAL; APPELLEES CARDINAL FRANCHISING, INC., D/B/A JANI-KING LOUISVILLE; AND JANI-KING LEASING CORP.
OPINION OF THE COURT BY JUSTICE HUGHES
REVERSING AND REMANDING
Jani-King International, Inc. (Jani-King) developed and maintains a
proprietary commercial cleaning system that involves selling to master
franchisees the right to operate as a Jani-King sub-franchisor in an exclusive
territory. These master franchisees, like Appellee Cardinal Franchising, Inc.
(Cardinal), in turn sell Jani-King unit franchises to individuals interested in
operating a commercial cleaning franchise in the master franchisee’s territory.
The individuals are generally required to form a limited liability company with
the master franchisee. This type of multi-tiered franchise system has become
relatively common in the janitorial cleaning industry across the United States. Appellant Constance Mouanda is the sole member and owner of the
assetless The Matsoumou’s, LLC (the LLC). After Mouanda formed the LLC for
which Cardinal provided all the necessary legal documents, the LLC entered a
Franchise Agreement with Cardinal, purchasing the rights to operate as a unit
franchisee. Having never realized the profits promised under the Franchise
Agreement with Cardinal, Mouanda individually filed suit in Jefferson Circuit
Court for fraud, breach of contract, and unconscionability. In addition, she
sought damages for Cardinal and Jani-King’s failure to comply with Kentucky’s
wage and hour laws. The trial court granted Cardinal’s and Jani-King’s motion
to dismiss based on Mouanda’s failure to bring the suit on behalf of the LLC
and the Court of Appeals affirmed. Having granted discretionary review and
carefully reviewed the record, we reverse the Court of Appeals and remand this
case for further proceedings consistent with this Opinion.
FACTS
Jani-King was founded as a commercial cleaning company in the 1960s.
Since that time, Jani-King has grown into one of the world’s largest commercial
cleaning franchise companies. Jani-King originally hired employees to perform
cleaning services but, beginning in the 1970s, Jani-King shifted its focus to
selling franchises. It sells “master franchises,” which give the master
franchisee the exclusive right to use Jani-King’s brand name, reputation, and
cleaning system within a defined geographic area. Jani-King is not a party to
the franchise agreements between a master franchisee and unit franchisee.
2 Cardinal is a Kentucky corporation and the Jani-King master franchisee
for Louisville/Jefferson County and fifteen surrounding counties in Kentucky
and Indiana. Master franchisees, like Cardinal, are responsible for selling “unit
franchises,” training unit franchisees, and securing cleaning contracts (with
office buildings, hospitals, hotels, manufacturers, etc.) for unit franchisees to
perform. Unit franchisees are the “boots on the ground”—the unit franchisee,
either alone or with his/her employees, cleans commercial buildings using
Jani-King’s prescribed methods, products, and equipment. Master franchisees,
like Cardinal, are responsible for ensuring proper use of Jani-King proprietary
information in their territory, and if they fail to do so, Jani-King reserves the
right to enforce any necessary provisions in Cardinal’s unit franchise
agreements. Unit franchisees can purchase or lease products and equipment
from Jani-King Leasing Corporation, a separate entity from Jani-King
International, but are not required to do so.1
In 2017, Constance Mouanda, a Congolese immigrant residing in
Louisville, Kentucky, inquired about purchasing a unit franchise from
Cardinal. According to Mouanda, Cardinal would not sell a unit franchise to
her individually. Instead, Cardinal required Mouanda to form a limited liability
company to purchase the franchise. Cardinal drafted the paperwork necessary
for Mouanda to form The Matsoumou’s, LLC (the LLC), and Mouanda executed
1 Although named as a party in Mouanda’s complaint, Jani-King Leasing Corporation is not a party to regional or unit franchise agreements and has not sold or leased any cleaning equipment in Kentucky in the last three years. It has not sold or leased any cleaning equipment to Mouanda or the LLC.
3 the documents on November 11, 2017. Several months later, in February
2018, the LLC entered into a unit franchise agreement with Cardinal (the
Franchise Agreement). As is typical in the Jani-King system, Jani-King was
not a party to the Franchise Agreement. However, Jani-King’s contract with
Cardinal reserves Jani-King’s right to enforce unit franchise agreements if
Cardinal fails to protect its branding. Mouanda, as president of the LLC, paid
Cardinal a total of $12,000 for the unit franchise.2 According to Mouanda,
Cardinal assured her that the LLC would earn at least $2,000 per month from
the cleaning business referred to her by Cardinal.
In January 2019, Mouanda, individually, sued Cardinal and Jani-King in
Jefferson Circuit Court alleging fraud, breach of contract, and
unconscionability. Mouanda also sought damages for Cardinal’s and Jani-
King’s failure to comply with Kentucky’s wage and hour laws. Specifically,
Mouanda alleged that the companies’ franchise model was an attempt to
circumvent employment law—by labeling janitors as franchisees, Cardinal and
Jani-King freed themselves of the obligation to pay minimum wage and provide
other employee protections.
Cardinal and Jani-King filed motions to dismiss the complaint. In its
motion, Cardinal asserted that Mouanda, individually, lacked standing to bring
any claims against it because the Franchise Agreement was between Cardinal
and the LLC. Cardinal also asserted that because Mouanda owns an
2 The $12,000 payment to Cardinal includes a $6,000 down payment and
$6,000 in franchise fees.
4 independent franchise through the LLC, which is not a party, she is not an
employee but rather an independent contractor employed by her own entity.
For its part, Jani-King asserted that it had no contractual or employment
relationship with Mouanda or the LLC. Jani-King, a Texas corporation, also
argued that Kentucky lacks personal jurisdiction over it.
In response to the motions to dismiss, Mouanda asserted that discovery
would likely show that Cardinal is an agent of Jani-King due to the level of
control it exerts over Cardinal. Relatedly, Mouanda contended that Jani-King’s
relationship with Cardinal allowed Kentucky to properly exercise personal
jurisdiction over Jani-King. As to the standing issue, Mouanda argued that the
fraud and wage and hour claims belonged to her, individually. Specifically,
Mouanda claimed that the fraud was perpetrated prior to her required
formation of the LLC. She also argued that she was the proper party to bring a
wage and hour claim because she, not the LLC, was Cardinal’s and Jani-King’s
de facto employee. Finally, Mouanda acknowledged that the Franchise
Agreement was between Cardinal and the LLC. She advised the trial court of
her intent to file an amended complaint adding the LLC as a plaintiff for the
contract claims, but this was never done before the trial court dismissed for
failure to state a claim some five months after the filing of the complaint.
After considering the parties’ arguments, the trial court granted
Cardinal’s and Jani-King’s motions to dismiss. The trial court ruled that
Mouanda lacked standing to assert the claims in her complaint. In support of
that holding, the trial court cited Turner v. Andrew, 413 S.W.3d 272 (Ky. 2013),
5 for the proposition that an LLC’s sole member could not assert claims
belonging to the LLC. The trial court found that all the claims raised in
Mouanda’s complaint related to acts that took place after the formation of the
LLC and, consequently, the LLC needed to assert those claims. As to
Mouanda’s assertion that formation of the LLC was part of the fraud, the trial
court concluded that formation of the LLC caused no harm to Mouanda.
Notably, the trial court made no express mention of Mouanda’s wage and hour
claims.
Mouanda appealed the dismissal of her complaint and the Court of
Appeals unanimously affirmed. The Court of Appeals agreed that Mouanda
lacked standing to bring suit and the proper plaintiff was the LLC, the named
franchisee in the Franchise Agreement with Cardinal. Unlike the trial court,
the appellate court addressed Mouanda’s wage and hour claims, but it simply
distinguished cases from other jurisdictions where wage and hour claims
against Jani-King were allowed to proceed by noting that in those cases the
franchisees were individuals as opposed to limited liability companies. Finding
the absence of the LLC fatal to all of the claims, the Court of Appeals concluded
that the trial court properly dismissed Mouanda’s complaint in its entirety.
ANALYSIS
Motions to dismiss pursuant to Kentucky Rule of Civil Procedure (CR)
12.02 for failure to state a claim are reviewed de novo. Marshall v. Montaplast
of N. Am., Inc., 575 S.W.3d 650, 651 (Ky. 2019). In ruling on a motion for
failure to state a claim, the trial court should take all the allegations in the
6 complaint as true and not dismiss “unless the pleading party appears not to be
entitled to relief under any set of facts which could be proven in support of his
claim.” Id. (quoting Morgan v. Bird, 289 S.W.3d 222, 226 (Ky. App. 2009)). In
addition, all pleadings should be “liberally construed in the light most favorable
to the plaintiff . . . .” Fox v. Grayson, 317 S.W.3d 1, 7 (Ky. 2010) (quotations
and citations omitted). Notably, the trial court is not required to make any
findings of fact, “rather, the question is purely a matter of law. Stated another
way, the court must ask if the facts alleged in the complaint can be proved,
would the plaintiff be entitled to relief?” Id.
I. Mouanda’s Wage and Hour Claims Generally
We begin with whether Mouanda, not the LLC, is the proper plaintiff for
the wage and hour claims against Cardinal and Jani-King. First, we recognize
the distinction between an LLC and its members. In Turner, 413 S.W.3d at
273, the plaintiff filed a lawsuit in his individual capacity, even though the
trucking business was operated by an LLC. This Court explained that an LLC
and its sole member are not legally interchangeable. Id. at 276. In that case,
the only proper plaintiff to assert lost business damages was the LLC itself. Id.
at 278. As the Court explained, “an LLC is not a legal coat that one slips on to
protect the owner from liability but then discards or ignores altogether when it
is time to pursue a damage claim. The law pertaining to limited liability
companies simply does not work that way.” Id. at 276. However, Mouanda is
not asserting a wage and hour claim that, if applicable, belonged to the LLC.
Rather, she claims that she, as an individual, was the party injured by the
7 alleged violation of the wage and hour laws. Her claimed damage is that she
was deprived of the minimum wage and other worker protections and the
existence of the LLC which Cardinal required her to form—indeed formed for
her—cannot deprive her of the law’s protection.
The Kentucky Wage and Hour Act (KWHA) protects employees from the
unlawful wage and hour practices of their employer. Kentucky Revised Statute
(KRS) 337.010-.433. For the KWHA to apply, an employee-employer
relationship must exist, a relationship which requires an employee and
employer and the act or condition of employment. The KWHA adopts the
following definitions:
(d) “Employer” is any person, either individual, corporation, partnership, agency, or firm who employs an employee and includes any person, either individual, corporation, partnership, agency, or firm acting directly or indirectly in the interest of an employer in relation to an employee[.]
KRS 337.010(1)(d).
(e) “Employee” is any person employed by or suffered or permitted to work for an employer, except that:
1. Notwithstanding any voluntary agreement entered into between the United States Department of Labor and a franchisee, neither a franchisee nor a franchisee’s employee shall be deemed to be an employee of the franchisor for any purpose under this chapter; and
2. Notwithstanding any voluntary agreement entered into between the United States Department of Labor and a franchisor, neither a franchisor nor a franchisor’s employee shall be deemed to be an employee of the franchisee for any purpose under this chapter.
8 KRS 337.010(1)(e). Although the KWHA was created over 80 years ago, a 2017
amendment to its definitions resulted in the explicit exclusion of franchisees
and their employees from qualifying as employees of the franchisor.
Jani-King and Cardinal insist that the plain language of KRS
337.010(1)(e)1 precludes Mouanda’s KWHA claim but our application of that
language to these facts causes us to conclude otherwise. The statute provides
that “neither a franchisee nor a franchisee’s employee” can be an employee of
the franchisor, language Jani-King and Cardinal as the franchisor and sub-
franchisor claim protects them from any employment relationship with
Mouanda. The franchisee in this case, however, is not, as Jani-King and
Cardinal have repeatedly pointed out, Constance Mouanda, but rather the LLC
they required and formed for her. Additionally, nothing in the record suggests
that Mouanda is an employee of the LLC rather than its sole
member/owner.3 If Cardinal had contracted with Mouanda individually
(making her the “franchisee”) or if she was the employee of a Jani-King
franchise owned by others (making her a “franchisee’s employee”), the
exclusionary language of KRS 337.010(1)(e)1 would be applicable. As it is, the
language does not place Mouanda beyond the scope of the KWHA but rather
requires consideration of the more commonly encountered issue of her status,
whether she is in fact an employee or an independent contractor.
3 As discussed below, the Franchise Agreement did not recognize Constance
Mouanda as an employee of the LLC but instead deemed her a “principal.”
9 As noted, Cardinal required Mouanda to form a limited liability company
in order to participate in the Jani-King janitorial system and it then provided
the LLC’s Articles of Organization, a corporate resolution authorizing the LLC
to contract with Cardinal, a waiver of notice of a Board of Directors’ meeting
and other legal documents for Mouanda to sign. Cardinal, the “Franchisor,”
and The Matsoumou’s, LLC, the “Franchisee,” then entered a Franchise
Agreement, which expressly states in paragraph 12.6:
The Parties agree and understand that Franchisee will be at all times an independent contractor under this Agreement and will not, at any time, directly or indirectly, hold itself out as an agent, servant, or employee of Franchisor. Nothing in this Agreement may be construed to create a partnership, joint venture, agency, employment, or fiduciary relationship of any kind. None of Franchisee’s employees will be considered to be Franchisor’s employees. . . .
(Emphasis added.) To the extent Cardinal and Jani-King rely on this
contractual provision as a bar to Constance Mouanda’s attempted KWHA
claims, we note that it requires the same end result as the exclusionary
language in KRS 337.010(1)(e), i.e., it has nothing to say about the individual,
Constance Mouanda. The LLC is the “Franchisee [which] at all times will be an
independent contractor under this Agreement.” As for the last sentence,
“[n]one of Franchisee’s employees will be considered to be Franchisor’s
employees,” once again Mouanda is not an employee of the Franchisee but
rather the sole owner/member of the Franchisee.
The distinction between Mouanda and a “Franchisee employee” as
referenced in paragraph 12.6 is underscored by a review of the Franchise
Agreement which identifies in paragraph 4.2.3 “[a]ll of Franchisee’s owners, 10 shareholders, members, managers, officers and directors” as “each a ‘Principal’
and collectively the ‘Principals.’” In other instances (e.g., paragraph 4.2.2) the
Franchise Agreement refers to the Franchisee’s “agents and employees.” In
short, the parties’ agreement explicitly acknowledges that Mouanda, as an LLC
owner, is not an employee of the LLC. Thus, the final sentence in paragraph
12.6 that declares none of the Franchisee’s [LLC’s] employees can be
considered to be the Franchisor’s [Cardinal’s] employees also does not
apply. In short, to the extent the parties’ contract is deemed relevant to
Constance Mouanda’s individual employment status, if any, vis-à-vis Cardinal
or Jani-King, the Franchise Agreement simply does not address that issue.
II. The Classification of an Individual as an Employee Or Independent Contractor Controls the Availability of Protections under Wage And Hour Laws
Franchisor and franchisee relationships, particularly the multi-tiered
structure of franchising relationships utilized by Jani-King, create complexities
in employment law. Generally, “franchising is . . . a unique, modern, multitier
marketing device used by independent, but mutually dependent,
businesspeople bound in contractual relationships.”4 A franchisor typically
provides the franchisee with a written license to use the franchisor’s
proprietary marks, business format, and methods.5 Initial training and
4 Dean T. Fournaris, The Inadvertent Employer: Legal and Business Risks of Employment Determinations to Franchise Systems, 27 Franchise L.J. 224 (2008).
5 Id.
11 ongoing advice or field support may also be offered, in exchange for some form
of initial and recurring fees.6
Typically, franchisees maintain a degree of independence, such as
controlling day-to-day operations, hiring and firing their own employees, and
choosing their own customers and pricing.7 The legal aspects of a franchise
relationship are intricate, and ideally all parties to the relationship understand
the potential legal implications of such an arrangement. As a result of the
often-unique franchisor and franchisee relationships (including sub-
franchisors), the workplace has become progressively complex, and positioning
individuals in the context of employment law requirements and protections is
increasingly difficult. One primary distinction is that of an employee from an
independent contractor. Designation as an employee or independent
contractor determines an individual’s entitlement, or lack thereof, to many
statutory employment protections. Many claims involving classification as
either an employee or independent contractor occur in federal court because of
the protections afforded by the Fair Labor Standards Act (FLSA).
a. The Fair Labor Standards Act
To improve the workplace, the FLSA, created in 1938, establishes the
minimum wage, regulates overtime eligibility, requires recordkeeping and sets
other labor standards. 29 United States Code Chapter 8, §§ 201-19.
Kentucky’s wage and hour laws as codified in KRS Chapter 337 are the
6 Id. 7 Id.
12 analogue to the FLSA. City of Louisville, Div. of Fire v. Fire Serv. Managers
Ass’n ex rel. Kaelin, 212 S.W.3d 89, 92 (Ky. 2006). In discussing the legislative
history of the FLSA, the United States Supreme Court explained that the Act
shows an intent on the part of Congress to protect certain groups of the population from substandard wages and excessive hours which endangered the national health and well-being and the free flow of goods in interstate commerce. The statute was a recognition of the fact that due to the unequal bargaining power as between employer and employee, certain segments of the population required federal compulsory legislation to prevent private contracts on their part which endangered national health and efficiency and as a result the free movement of goods in interstate commerce. To accomplish this purpose standards of minimum wages and maximum hours were provided.
Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697, 706-07 (1945). Further, the
legislative debates “indicate that the prime purpose of the legislation was to aid
the unprotected, unorganized and lowest paid of the nation’s working
population; that is, those employees who lacked sufficient bargaining power to
secure for themselves a minimum subsistence wage.” Id. at 707 n.18 (citations
omitted). The comprehensive nature of the protections provided by the FLSA
makes the distinction between independent contractors and employees vitally
important.
Under the FLSA, employees are entitled to overtime and minimum wage
compensation while independent contractors are not. Keller v. Miri
Microsystems, LLC, 781 F.3d. 799, 806 (6th Cir. 2015). From a federal
standpoint, a franchisee is generally classified as an independent contractor,
but “may be entitled to the protections of the FLSA if it is able to allege an
13 employer-employee relationship with the franchisor.”8 To determine whether
an individual is an employee or an independent contractor, many courts have
applied the well-established economic realities test, which focuses on the
economic interactions between workers and an employer beyond the plain
terms of a contract.9 The economic realities test was formed in response to the
FLSA’s failure to clearly define the differences between an independent
contractor and an employee.
Federal law lacks a substantive statutory scheme to clarify the difficulties
in distinguishing employees from independent contractors. Additionally, the
United States Supreme Court has not officially recognized a test or rule for
distinguishing between employees and independent contractors. Many states
have addressed the issue by adopting and applying various classification
tests.10 Some federal Courts of Appeals have adopted and applied the
8 Fair Labor Standards Act, 14 Bus. & Com. Litig. Fed. Cts. § 150:60 (5th ed.). 9Stephanie Sullivant, Restoring the Uniformity: An Examination of Possible Systems to Classify Franchisees for Workers’ Compensation Purposes, 81 UMKC L. Rev. 993, 1006 (2013).
10 Other tests for classifying individuals as employees or independent contractors are the control test, and the relative nature of the work test. First, the control test requires employers to prove “that the services at issue are performed (a) free from control or direction of the employing enterprise; (b) outside of the usual course of business . . . ; and (c) as part of an independently established trade, occupation, profession, or business of the worker.” Coverall N. Am., Inc. v. Com’r of Div. of Unemployment Assistance, 857 N.E.2d 1083, 1087 (2006) (quoting Athol Daily News v. Bd. of Review of the Div. of Emp’t & Training, 786 N.E.2d 365, 369 (2003)). Under the relative nature of the work test, the classification of an individual depends on “the nature of the claimant’s work in relation to the regular business of the employer.” Hannigan v. Goldfarb, 147 A.2d 56, 64 (N.J. App. Div. 1958). The test considers “whether the work done is an integral part of the employer’s regular business; and whether the worker in relation to the employer’s business is in a business or profession of his own.” Id.
14 economic realities test.11 The Sixth Circuit has interpreted the FLSA
framework by recognizing its legislative purpose and concluding that
“employees are those who as a matter of economic reality are dependent upon
the business to which they render service.” Donovan v. Brandel, 736 F.2d
1114, 1116 (6th Cir. 1984) (quoting Dunlop v. Carriage Carpet Co., 548 F.2d
139, 145 (6th Cir. 1977)). Thus, the Sixth Circuit identified six factors to
consider:
1) the permanency of the relationship between the parties;
2) the degree of skill required for the rendering of the services;
3) the worker’s investment in equipment or materials for the task;
4) the worker’s opportunity for profit or loss, depending upon his skill;
5) the degree of the alleged employer’s right to control the manner in which the work is performed; and
6) whether the service rendered is an integral part of the alleged employer’s business.
Keller, 781 F.3d at 807 (quotations and citations omitted). No one factor is
determinative and “a central question is the worker’s economic dependence
upon the business for which he is laboring.” Id.
Although Kentucky has not addressed the employee/independent
contractor distinction under the KWHA, considering economic realities for
11 See, e.g., Acosta v. Jani-King of Oklahoma, Inc., 905 F.3d 1156, 1160 (10th Cir. 2018); Donovan v. DialAmerica Mktg., Inc., 757 F.2d 1376 (3d Cir. 1985); Real v. Driscoll Strawberry Assoc., 603 F.2d 748 (9th Cir. 1979). The United States Supreme Court first described what is now known as the economic realities test in Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947), but the test was explained in dicta.
15 employment classification purposes is not entirely new in Kentucky. In
Stewart v. University of Louisville, 65 S.W.3d 536, 539 (Ky. App. 2001), a
graduate student was dismissed from a fellowship program and the Court of
Appeals was tasked with determining whether the student was an “employee”
for purposes of her discrimination claims. The appellate court examined the
economic realities underlying the relationship and ultimately concluded it was
not an employer-employee relationship. Id. at 540.12 In Ratliff v. Redmon, 396
S.W.2d 320 (Ky. 1965), this Court’s predecessor outlined nine factors used to
determine whether an individual is an employee or an independent contractor.
The Ratliff test is consistent with the economic realities test and includes five of
the same factors as the Sixth Circuit test.13
12 See also Burkich v. Com., Cab. for Health and Family Servs., 2005-CA- 000333-MR, 2006 WL 2574024, at *2 (Ky. App. Sept. 8, 2006) (To determine whether an individual is an “employee” for Title VII purposes, one must examine the economic realities “to determine whether that individual is likely to be susceptible to the discriminatory practices which the act was designed to eliminate.”).
13The Ratliff factors for determining whether an individual is an employee or an independent contractor are: (a) the extent of control which, by the agreement, the master may exercise over the details of the work;
(b) whether or not the one employed is engaged in a distinct occupation or business;
(c) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;
(d) the skill required in the particular occupation;
(e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;
(f) the length of time for which the person is employed; 16 The relationships between Jani-King, Cardinal, the LLC, and Mouanda
bear the potential for misclassification. We note that several cases across the
United States allege that Jani-King and similarly-structured janitorial
companies use franchise models to evade obligations to individuals who qualify
as employees under labor laws. To provide a framework for analyzing whether
Mouanda may be deemed an employee of Jani-King or Cardinal, we turn to
other jurisdictions for guidance.
b. Multi-Tiered Franchising Relationships And Classifications in Other Jurisdictions
Mouanda is far from the first plaintiff to challenge Jani-King’s business
structure. In Acosta, 905 F.3d at 1158, the United States Secretary of Labor
filed a complaint alleging that Jani-King of Oklahoma violated the FLSA by
failing to keep employee records for the individuals performing janitorial work
as unit franchisees (i.e., people like Mouanda). The Secretary’s complaint
noted that Jani-King had recently begun requiring individuals to form
corporate entities to execute unit franchise agreements with Jani-King. Id.
The complaint further alleged that the “individuals who form corporate entities
(g) the method of payment, whether by the time or by the job;
(h) whether or not the work is a part of the regular business of the employer;
and
(i) whether or not the parties believe they are creating the relationship of master and servant.
Ratliff, 396 S.W.2d at 324-25.
17 and enter franchise agreements as required by Jani-King nonetheless
personally perform the janitorial work on behalf of Jani-King and, based on the
economic realities of this relationship, are Jani-King’s employees under the
FLSA.”14 Id.
Jani-King moved to dismiss the Secretary’s complaint for failure to state
a claim, “arguing that the Secretary is not free to ignore [the franchisees’]
corporate organization[s].” Id. The district court agreed with Jani-King and
determined that the Secretary’s complaint “failed to state a claim because a
corporate entity can never be an ‘individual,’ which is a statutory prerequisite
to status as an ‘employee.’” Id. at 1159. The Secretary appealed, and the
Tenth Circuit reversed because the district court’s rationale ignored the
economic realities test. Id. The Tenth Circuit noted that the purpose of the
economic realities test, which is used for determining whether an individual is
an employee under the FLSA, is to examine the true nature of an individual’s
working relationship with the purported employer, rather than relying on the
contractual label or structures applied to the relationship. Id. The Court held
that the facts in the Secretary’s complaint identified individuals who might be
employees under the economic realities test. Id. at 1161. Because the district
In fact, that complaint by the Secretary of Labor describes Jani-King of 14
Oklahoma as follows: Defendant structures its business in a way that attempts to avoid providing its workers with the protections afforded by the FLSA. Rather than properly classifying its cleaners as employees, Defendant deems these workers independent franchise owners, and therefore outside the scope of federal wage and hour protections.
18 court erroneously ruled that it could not look behind the corporate structures
required by Jani-King, the Tenth Circuit reversed and remanded for further
proceedings. Id. at 1162.15
In this case, the Court of Appeals rejected Mouanda’s reliance on Acosta
because “the Acosta Court did not decide whether an individual has standing
to pursue a claim after the formation of an LLC, but merely held that the
Secretary of Labor had survived the motion to dismiss . . . .” While the Tenth
Circuit did not explicitly answer the question of standing, it held that the
complaint (which alleged the same claims or similar to Mouanda’s) survived a
motion to dismiss because the individuals “who personally perform the
janitorial cleaning work” could plausibly be “employees” under the economic
realities test. 905 F.3d at 1161.
In another Jani-King case, the Third Circuit Court of Appeals upheld the
class certification in a claim filed on behalf of nearly 300 Jani-King franchisees
in Philadelphia alleging violations of Pennsylvania wage payment and collection
law. Williams v. Jani-King of Philadelphia Inc., 837 F.3d 314, 319 (3d Cir.
2016). The dispute hinged on whether workers were properly classified as
employees or independent contractors. Id. at 316. Citing its prior decision in
Drexel v. Union Prescription Centers, Inc., 582 F.2d 781, 784 (3d Cir. 1978), the
Third Circuit stated
the mere existence of a franchise relationship does not necessarily trigger a master-servant relationship, nor does it automatically
15 On remand, the parties proceeded with discovery. As of August 8, 2022, the
case remains pending on cross-motions for summary judgment.
19 insulate the parties from such a relationship. Whether the control retained by the franchisor is also sufficient to establish a master- servant relationship depends in each case upon the nature and extent of such control as defined in the franchise agreement or by the actual practice of the parties.
Williams, 837 F.3d at 324-25. The Court declined to weigh in on the merits of
the wage claim, reasoning that the class certification stage is not the place for
merit-based decisions. Id. at 322. Ultimately, after the decade-long class
action suit, the parties reached a settlement agreement in which the Jani-King
defendants agreed to pay $3.7 million, compensating the franchisees for their
misclassification as independent contractors.16
In Vazquez v. Jan-Pro Franchising International, Inc., 986 F.3d 1106,
1110 (9th Cir. 2021), the Ninth Circuit referenced cases dating back to 2008
involving Jan-Pro, another major international janitorial cleaning business.
Under its business model, Jan-Pro contracts with “master franchisees”
(regional, third-party entities), who in turn sell business plans to “unit
franchisees.” Id. at 1111. Master franchisees provide their unit franchisees
with initial business, equipment, and cleaning supplies. Id. The franchise
agreements make it clear that unit franchisees are independent contractors.
Id. The Vasquez case involved numerous plaintiffs from various states with a
common cause to pursue, namely that Jan-Pro had developed a sophisticated
“three-tier” franchising model to avoid paying its cleaners minimum wage and
16 The United States District Court for the Eastern District of Pennsylvania granted plaintiffs’ Unopposed Motion for Preliminary Class Action Settlement. Myers v. Jani-King of Philadelphia, Inc., No. 09-1738, 2019 WL 2077719, at *4 (E.D. Pa. May 10, 2019).
20 overtime compensation by misclassifying them as “independent contractors.”
Id. at 1110.17
The Vazquez plaintiffs were unit franchisees who filed a class action
alleging that Jan-Pro Franchising International, which entered into franchise
agreements with master franchisees, used its multi-leveled franchise model to
misclassify them as independent contractors, rather than employees, and thus
could avoid paying them minimum wage and overtime. Id. at 1118. The Ninth
Circuit explained the retroactive application of Dynamex Operations West, Inc.
v. Superior Court, 416 P.3d 1 (Cal. 2018), in which the California Supreme
Court adopted the “ABC test” for determining whether workers are independent
contractors or employees under California wage laws.18 Vazquez, 986 F.3d at
1109. Because the lower court had no opportunity to consider whether
17 According to the Court, the National Employment Law Project asserted “a strong interest in this case because of the impacts of [Jan Pro’s] franchising schemes and those of similar janitorial companies on low-wage and immigrant workers and their communities . . . .” Vazquez, 986 F.3d at 1110. 18 Under the ABC test, which is also called the control test, all workers are
presumptively employees, and not independent contractors, unless the hiring entity satisfies all three of the following: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
(b) that the worker performs work that is outside the usual course of the hiring entity’s business; and
(c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Dynamex, 416 P.3d at 41.
21 plaintiffs were employees or independent contractors under the Dynamex
standard, and neither party had the opportunity to supplement the record
regarding the Dynamex criteria, the Ninth Circuit remanded the case for the
lower court’s consideration. Id. at 1122. In doing so, the Court emphasized
the fact-intensive nature of such inquiry and noted that the lower court should
consider the classification with the benefit of a more developed record. Id.
In another case involving Jan-Pro, Depianti v. Jan-Pro Franchising
International, Inc., 990 N.E.2d 1054, 1058 (Mass. 2013), Depianti, a janitorial
cleaning services franchisee, along with others, filed a class action suit against
Jan-Pro Franchising International, Inc., claiming that Jan-Pro misclassified
them as independent contractors and committed wage law violations. Depianti
contracted with Bradley Marketing Enterprises, a Jan-Pro regional master
franchisee, to purchase a unit franchise. Id. at 1059. The Supreme Judicial
Court of Massachusetts was tasked with determining, among other issues,
whether a contract between Jan-Pro and Depianti was a necessary element for
a claim for misclassification under the Massachusetts independent contractor
statute. Id. at 1065. That statute outlines whether a person providing services
is a statutory employee, and thus entitled to wage and hour protections, or an
independent contractor and therefore exempt from those protections. Mass.
Gen. Laws ch. 149, § 148B.
In considering that question, the Supreme Judicial Court of
Massachusetts reasoned that
22 [a]ssuming without in any way suggesting that Depianti was working as an employee of Jan–Pro, and not as an independent contractor, Jan–Pro’s contractual arrangement with Bradley, if enforceable, would provide a means for Jan–Pro to escape its obligation, as an employer, to pay lawful wages under the wage statute . . . .
Id. at 1068. The court concluded that “the lack of a contract for service
between the putative employer and putative employee does not itself preclude
liability” under the independent contractor statute. Id. at 1069. The court
further explained its reasoning with a hypothetical:
[C]ompany A contracts with company B for services, and company B enters into arrangements with third parties to perform the work it undertook under its contract with company A. We agree that ordinarily, in such circumstances, company A would not be liable for misclassification of the third-party workers. This is because ordinarily, in such circumstances, company B would be the agent of any misclassification. However, here Depianti alleges that Jan– Pro, and not Bradley, designed and implemented the contractual framework under which he was misclassified as an independent contractor. The lack of a contract between Depianti and Jan–Pro does not itself preclude liability. Where a party is the agent of misclassification, it may be directly liable under [the independent contractor statute] even where it utilizes a proxy to make arrangements with its employees.
Id. at 1068 n.17.
While Vazquez and Depianti did not involve Jani-King International or
any of its master franchisors, the Jan-Pro business model and multi-tiered
structured franchise approach appears very much like the Jani-King model.19
19 Other courts have examined franchising arrangements and what effect those arrangements have on an individual’s status as an employee or independent contractor. See Jason Roberts, Inc. v. Adm’r, 15 A.3d 1145, 1150 (Conn. App. 2011) (existence of a franchise agreement did not exempt the employment relationship from the application of the ABC test or purview of the unemployment compensation act); Coverall, 857 N.E.2d at 1087 (franchisor could not meet its burden of establishing that franchisee was an independent contractor); Hayes v. Enmon Enters., 23 Applying the reasoning in Depianti, the nonexistence of a contract between
Mouanda individually and Jani-King or Cardinal does not automatically
preclude Jani-King or Cardinal from liability for wage and hour claims. These
employment relationships are complex and determining each party’s status
requires more than examination of the documents signed by the parties and, to
reiterate, prepared by Cardinal and Jani-King. As in Vazquez, since the trial
court dismissed Mouanda’s claim less than six months after she filed her
complaint, the record is undeveloped. The trial court should have the benefit
of a more developed record to conduct the fact-intensive inquiry necessary to
determine Mouanda’s true legal status.
III. A Fact-Intensive Examination of Mouanda’s Status Is Required
The foregoing cases illustrate that the distinction between employees and
independent contractors is often blurred, especially in the realm of franchise
agreements. Clearly, a business entity cannot use the labels of “franchisor”
and “franchisee” to avoid employment law and regulation. Instead how the
parties functioned and conducted their businesses must be analyzed and mere
reliance on their contract labels is inappropriate. The Franchise Agreement
alone suggests that Cardinal maintained a significant degree of control over the
LLC, No. 3:10-CV-00382-CWR-LRA, 2011 WL 2491375, at *6 (S.D. Miss. June 22, 2011) (Although the Franchise Agreement between Jani-King and an LLC performing cleaning services suggested an independent contractor relationship, the degree of control over the LLC’s physical conduct was too great to pass off as creating an independent contractor. The existence of this genuine issue of material fact defeated Jani-King’s motion for summary judgment.).
24 day-to-day activities of the LLC (and therefore Constance Mouanda individually
as the “principal”) in performing cleaning services. Some of the notable
provisions are:
Retention and ownership of any improvements to Jani-King systems or new concepts developed by the LLC. 4.26.
Requiring Franchisee [(the LLC)] to follow established Jani-King policies, practices and procedures and to not deviate therefrom without prior written consent of Franchisor [(Cardinal)]. 4.2.2.
Cardinal’s exclusive right to perform all billing and accounting functions for all services provided by the LLC; for an Accounting Fee20 of 4% of the LLC’s monthly gross revenue. 4.7.
Franchisor may inspect or examine the accounts, books, records, and tax returns of Franchisee at any reasonable time. 4.9.2.
If there is a deficiency in Franchisee’s cleaning work which Franchisor rectifies, there is a $50 per hour Service Fee plus travel and expenses to send a representative of Franchisor to correct the work. 4.18.4, 4.23.
Franchisor must approve any office location, furniture, and décor thereof to protect the image and reputation of Jani-King. Franchisee must, within a reasonable time as specified by Franchisor, make all necessary additions, alterations, repairs and replacements to office as required by Franchisor, but no others without Franchisor’s prior written consent. 4.11.1.
Franchisor may inspect any premises serviced by Franchisee at any time to ensure that the quality of service being rendered is in accordance with Jani-King standards. 4.18.
If a deficiency in performance is discovered which requires action to meet a customer’s demand in less than four hours and Franchisor is not able to reach Franchisee or Franchisee is not available for an immediate visit or performance of services,
20In addition to the Accounting Fee, Cardinal charged an Advertising Fee (2% of the Franchisee’s Gross Revenue); a Royalty Fee (10% of Gross Monthly Revenue); a Technology Fee (2% of Franchisee’s Gross Revenue); and other fees over and above the monthly Franchise Fee.
25 Franchisor can dispatch Franchisor’s own staff to correct all deficiencies in performance. 4.18.5.
Franchisor reserves the right to take over any job in which it views Franchisee’s work to be inadequate. Franchisee will not be offered the right to service an additional account to replace the cancelled or transferred account. 4.18.
Each of Franchisee’s representatives must be in an approved, clean uniform at any time they are performing services. 4.18.1.
Franchisor reserves the right to establish company policies and/or procedures pertaining to the operation of Franchisee’s franchised business or this Agreement. 4.24.
Franchisee shall be deemed in default, and Franchisor may terminate the Agreement without affording Franchisee any opportunity to cure the default upon notice of the occurrence of seventeen different events. 8.1.
In assessing the true nature of the parties’ relationship, courts must look
at the practical, not just contractual, realities of the relationship between Jani-
King, Cardinal, the LLC, and Mouanda. Mouanda alleges that Cardinal never
offered her enough cleaning contracts to fulfill its obligations to the LLC under
the Franchise Agreement and states:
Defendant’s “franchisees” are in fact laborers due to the virtue of the extensive control of Defendant over laborers, economic realities of laborers, relationship of laborers to the enterprise, and other factors courts consider when investigating pretextual independent contractor relationships.
These allegations and others in Mouanda’s complaint are sufficient to
survive a motion to dismiss and the trial court erred in dismissing the wage
and hour claims on the erroneous premise that any such claims belonged to
the LLC. On remand, the trial court must apply the economic realities test and
examine the true nature of the individual’s (Constance Mouanda’s) working
26 relationship with the purported employer, rather than relying on the
contractual label or structures applied to the relationship. Acosta, 905 F.3d at
1159-60. The LLC structure which Jani-King and Cardinal mandated and
created for Mouanda is no bar to a Kentucky wage and hour claim if she is
actually an employee.
We recognize
the settled law in Kentucky [is] that one who signs a contract is presumed to know its contents, and that if he has an opportunity to read the contract which he signs he is bound by its provisions, unless he is misled as to the nature of the writing which he signs or his signature has been obtained by fraud.
Hathaway v. Eckerle, 336 S.W.3d 83, 89–90 (Ky. 2011) (quoting Clark v.
Brewer, 329 S.W.2d 384, 387 (Ky. 1959)). But, as we have explained, nothing
in the Franchise Agreement precludes a wage and hour claim by Constance
Mouanda who is neither the Franchisee nor the Franchisee’s employee.
IV. The Fraud Claim Was Not Dependent on the LLC Being a Party to the Action
The breach of contract and unconscionability claims asserted by
Mouanda were in fact claims that should have been asserted by the contracting
party, The Matsoumou’s, LLC, so the trial court’s dismissal was legally
correct. The fraud claim, however, is not one that belongs solely, if at all, to
the LLC. Liberally construing the Complaint in the light most favorable to
Mouanda, Fox, 317 S.W.3d at 7, she alleges material misrepresentations from
the inception of her interactions with Jani-King/Cardinal, conduct that
preceded the mandatory formation of the LLC which Cardinal created and the
LLC’s signing of the Franchise Agreement. Consequently, the trial court erred 27 in dismissing the fraud claim without allowing Mouanda to develop facts
relevant to that claim through discovery.
In sum, the Franchise Agreement itself contains nothing that would
preclude a wage and hour claim by Constance Mouanda individually. Even if
the Franchise Agreement could be read to address Constance Mouanda
individually, Kentucky courts should look beyond that agreement and the Jani-
King/Cardinal-mandated limited liability company to the economic reality of
the situation, as have other jurisdictions faced with this particular business
scheme. On remand, discovery will allow the parties to develop the record so
the trial court can determine whether Mouanda has a valid wage and hour
claim and/or fraud claim.
CONCLUSION
Based on the foregoing, we reverse the Court of Appeals, and remand
this case for further proceedings consistent with this Opinion.
All sitting. All concur.
28 COUNSEL FOR APPELLANT:
Ryan Fenwick Amy S. Foster
COUNSEL FOR APPELLEES, JANI-KING INTERNATIONAL AND JANI-KING LEASING CORP.:
Raymond C. Haley Paul E. Goatley FISHER & PHILLIPS LLP
COUNSEL FOR APPELLEE, CARDINAL FRANCHISING, INC., D/B/A JANI-KING LOUISVILLE:
Randall S. Strause Andrew J. Williams Randall S. Strause, Jr. STRAUSE LAW GROUP, PLLC
29 30