September 27, 2022
By: Thomas O’Connell
Citation:
Streedharan v. Stanley Industrial & Automotive, LLC, 630 F.Supp.3d 1244 (2022)
Executive Summary:
In this unpublished decision, Judge Maame Ewusi-Mensah Frimpong of the United States District Court for the Central District of California denied Stanley Industrial & Automotive’s motion for judgment on the pleadings and motion to compel arbitration in a class action brought by Vijayan Streedharan, a Mac Tools distributor. The case centered on whether Mac Tools’ franchisees were misclassified as independent contractors under California law. The court found sufficient allegations of an employment relationship under both the Borello and Dynamex tests.
Relevant Background:
The plaintiff, Vijayan Streedharan, a Mac Tools distributor, initiated a class action lawsuit against the defendant, Stanley Industrial & Automotive, LLC, alleging labor law violations stemming from the misclassification of franchisees as independent contractors. Streedharan asserted that Mac Tools exercised significant control over distributors’ operations, including setting prices, controlling customer interactions, and requiring franchisees to purchase inventory from the franchisor. Additionally, Mac Tools mandated strict adherence to operational guidelines while imposing various fees, including non-refundable franchise fees and training costs.
The plaintiff claimed violations of the California Labor Code, citing sections addressing the reimbursement of business expenses (Cal. Lab. Code § 2802), overtime pay (Cal. Lab. Code § 510), meal and rest breaks (Cal. Lab. Code §§ 226.7, 512), and the timely payment of wages (Cal. Lab. Code §§ 201, 203). Streedharan also alleged unfair business practices under California’s Unfair Competition Law (Cal. Bus. & Prof. Code § 17200).
Mac Tools denied the allegations and sought dismissal of the claims. It argued that the plaintiff was an independent contractor operating through an LLC and, therefore, not entitled to employee protections. Additionally, the defendant moved to compel arbitration under the terms of the franchise agreement. Streedharan, in response, challenged the enforceability of the arbitration clause, describing it as procedurally and substantively unconscionable.
Thus, the court was tasked with determining whether the claims were viable under the employment classification standards set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989), which evaluates the degree of control over workers, and Dynamex Operations W. v. Superior Court, 4 Cal.5th 903 (2018), which applies the more rigid ABC test.
Decision:
The court denied the defendant’s motion for judgment on the pleadings and its request to compel arbitration.
- On the question of employment classification, the court found that Streedharan had plausibly alleged an employment relationship with Mac Tools because under the Dynamex ABC test, Mac Tools failed to demonstrate that its franchisees were independent contractors. Notably:
- Franchisees were not free from Mac Tools’ control over their work.
- The work performed (distributing Mac Tools products) was integral to Mac Tools’ core business.
- Franchisees were not engaged in independently established trades or businesses.
Similarly, under Borello, the court noted that the plaintiff plausibly alleged an employment relationship due to Mac Tools’ extensive control over franchisees.
- Regarding the arbitration agreement, the court held that the agreement was unenforceable due to its unconscionable terms. The agreement, presented as a “take-it-or-leave-it” contract, included provisions that significantly disadvantaged the franchisees. It required arbitration in a distant venue, limited remedies available to the franchisees, and imposed costs that made it burdensome for the plaintiff to pursue his claims. The court concluded that these factors rendered the agreement procedurally and substantively unconscionable, and therefore unenforceable.
- Lastly, Mac Tools argued that Streedharan lacked standing to bring these claims because he operated through an LLC, FLM Enterprises. The court rejected this argument, pointing to language in the franchise agreement that explicitly imposed obligations and responsibilities on the individual franchisee, regardless of the existence of a business entity.
By denying the motions, the court allowed the case to proceed, finding sufficient grounds to challenge both the employment classification and the arbitration provisions.
Looking Forward:
While the court allowed the plaintiff’s claims to proceed, it also underscored areas where franchisors can take proactive steps to avoid similar outcomes in future disputes.
- One key takeaway is the importance of carefully crafting franchise agreements to delineate franchisee autonomy clearly. While operational standards are necessary to protect brand integrity, franchisors should ensure these do not amount to excessive control over day-to-day activities, pricing, or customer management, which can blur the line between franchisees and employees. Therefore, revisiting operational policies and consulting with legal experts may help align practices with the standards set forth in the Dynamex ABC test and Borello test, especially in states like California.
- Arbitration clauses also require attention. The court’s invalidation of the arbitration agreement in this case was based on findings of procedural and substantive unconscionability. Thus, to reduce the likelihood of such challenges, franchisors can adopt arbitration provisions that are both fair and enforceable, such as offering negotiation opportunities, choosing accessible venues, and ensuring that remedies available to franchisees are reasonable and balanced. Properly structured agreements could have provided a stronger defense in this instance.
- Lastly, franchisors should take a proactive approach to labor law compliance, ensuring that policies regarding wages, breaks, and expenses are reviewed regularly for compliance with applicable statutes. Implementing clear documentation and providing franchisees with thorough training on their rights and responsibilities can help mitigate potential disputes.
While the court’s findings highlight challenges for franchisors, they also provide a guidance for refining agreements and operational policies to ensure that franchise systems remain legally sound and resilient against misclassification claims.