Contributed by Tom Kent
Recently, in a case involving the Subway franchise system, the Supreme Court of Kentucky reversed a Court of Appeals decision and held that Doctors’ Associates, Inc. (franchisor of the Subway system) could not be held liable for workers’ compensation claims arising from an uninsured franchisee. Doctors’ Associates, Inc. v. Uninsured Employers’ Fund, et al., Case No. 2010-SC-000568-WC, Nov. 23, 2011 (Ky. 2011). The language of the Opinion provides a striking contrast to the Opinion issued by the Massachusetts Supreme Court in the Awuah case chronicled earlier this year by the Fox franchise blog. See Awuah v. Coverall North America, Inc., 707 F.Supp.2d 80 (Mass. Dist. Ct.).
In the Doctors’ case, an employee of a Subway franchisee sought workers’ compensation benefits for a work related injury sustained while working in a Kentucky Subway restaurant. The franchisee did not have workers’ compensation coverage at the time of the injury. The claimant sought to recover benefits from Doctors’ as a potential “up the ladder employer” under Kentucky law. The critical issue was whether Doctors’ was a contractor and its uninsured franchisee its subcontractor under Kentucky law.
The Workers’ Compensation Board determined that the vast majority of Doctors’ business was “to act as a franchisor who licensed others to operate Subway stores.” The Board distinguished the relationship of Doctors’ and its franchisee from that of a contractor and subcontractor noting that the Franchise Agreement required the franchisee to pay Doctors’ a fee rather than the reverse. The Court of Appeals reversed the Board’s decision holding that the Board misapplied Kentucky law in concluding that Kentucky workers’ compensation law was not intended to encompass the relationship between a franchisor and a franchise because the statute failed to mention the relationship.
In a significant vicotry for franchisors, the Supreme Court of Kentucky reversed the Court of Appeals stating that while the Board did misinterpret Kentucky law, it properly analyzed the facts of the case under the statute. The Supreme Court agreed with the Board’s analysis that Doctors’ was in the business of franchising, not the business of selling sandwiches. The Court concluded that the franchisee did not perform a regular or recurrent part of Doctors’ business and that Doctors’ did not control the day-to-day activities of its franchisees. Further, the Court agreed with the Board that “[Doctors’] clearly is in the business of developing franchisees for the purpose of securing royalties rather than actually operating sandwich shops.”
In light of the Awuah decision earlier this year, the Opinion issued by the Supreme Court of Kentucky is welcome news to franchisors operating in Kentucky and throughout the United States.