Franchisor Not “Statutory Employer” in PA Workers’ Compensation

From time to time in a Pennsylvania workers’ compensation case, the entity who is actually the “employer” for workers’ comp purposes is not clear. This is frequently due to the direct employer lacking PA workers’ compensation insurance coverage (which is against the law). When we face such a situation, often we are looking to see if there is a “statutory employer,” which is when a party other than the direct employer is responsible for the payment of workers’ comp benefits (this is most often seen in the construction arena, with subcontractor and general contractor). Almost always, the Uninsured Employers Guaranty Fund (UEGF) is involved in such a case (since the direct employer failed to carry workers’ comp insurance).

Recently, the Commonwealth Court of Pennsylvania was called upon to determine an interesting issue in this area – is a franchisor a “statutory employer” for an employee of a franchisee, if the franchisee fails to carry workers’ compensation insurance? In a word, the answer is no. The case is Saladworks, LLC and Wesco Ins. Co. v. WCAB (Gaudioso and UEGF).

This case revolves around an employee (“Claimant”) who worked at a Saladworks restaurant which was owned and operated by G21, LLC. Claimant twisted both knees when he slipped on water, and was rendered disabled by the incident. Seeking workers’ compensation benefits, Claimant filed Claim Petitions against both G21, LLC and the UEGF. In turn, UEGF filed a Joinder Petition against Saladworks, alleging that Saladworks (the franchisor) was the statutory employer in this case.

After hearing the evidence, the Workers’ Compensation Judge (WCJ) granted the Claim Petitions and dismissed the Joinder Petition. The WCJ concluded that a franchisor is not a statutory employer for a franchisee, as it fails to meet the definition of “Employer” in the Pennsylvania Workers’ Compensation Act. The Workers’ Compensation Appeal Board (WCAB), however, reversed on appeal. The WCAB felt that the WCJ erred in looking at the degree of control held by a franchisor, rather than looking at the situation as discussed in the 2012 Pennsylvania Supreme Court case of Six L’s Packing Company v. Workers’ Compensation Appeal Board (Williamson). This case addresses that the true focus in a statutory employer case must be on whether the company contracted with the other company to have work performed that was a regular part of the first company’s business.

On appeal to the Commonwealth Court of Pennsylvania, Saladworks argued that the WCAB was wrong, and that a franchisor was not a statutory employer for the employees of a franchisee, since the business conducted by the two companies is not the same. The Court agreed and reversed the WCAB, reinstating the decision of the WCJ (which in essence made the UEGF responsible for payment). Specifically, the Court concluded:

This Court must agree with Saladworks that its main business is the sale of franchises to franchisees that desire to use its name and ‘System’ and marketing expertise. While Saladworks and G21 are connected through the Agreement, this Court is not prepared to adopt the reasoning of the Board. While Saladworks provides certain services to independent franchisees like G21, it is not in the restaurant business or the business of selling salads.”

While the concept of statutory employer is no longer as critical to the injured worker in Pennsylvania (given the advent of the UEGF), there is still value to having a statutory employer found (and with it, PA workers’ compensation insurance coverage). The UEGF has many advantages, to the detriment of the injured worker, that cannot be used by a statutory employer (or its insurance carrier). That said, there is a great deal of logic and reason in this decision, making it difficult for us to disagree with the result.