Would the proposed Virginia Worker Misclassification Act treat franchisees as employees of their franchisors?

Plain-English summary

Delegate LeMunyon asked about Senate Bill 34, the proposed Worker Misclassification Act under consideration in the 2010-2011 General Assembly. The bill would have established a new Code section, § 40.1-28.13, applying a three-part "ABC test" to determine whether someone is an employee for purposes of Title 40.1 (labor and employment), Title 60.2 (unemployment compensation), and Title 65.2 (workers' compensation). LeMunyon wanted to know whether the bill would apply to franchises, and if so, whether franchisees would be reclassified as employees of their franchisors.

The AG gave a layered answer. By plain text, the bill does not exclude franchises. So the test would apply. But applying the test to typical franchise arrangements would in practice exclude franchisees from being classified as employees.

The bill's ABC test: an individual who performs services for an employer for remuneration is considered an employee unless the employer can show (A) the individual has been and will continue to be free from direction and control, (B) the service is outside the usual course of the employer's business, and (C) the individual is customarily engaged in an independently established trade, occupation, profession, or business.

The AG worked through how this test fits franchise relationships:

• The franchisee is not performing services "for" the franchisor in the ordinary sense. The franchisee is operating its own business for its own profit.
• The franchisee is not being "remunerated by" the franchisor. The reverse is true: the franchisee pays the franchisor for the right to use the trademark and business system.
• The typical franchisee is not an "individual" at all but a corporation.

All three points push franchisees out of the ABC test's scope. The application of the test "in general, would exclude franchisees from the scope of S.B. 34."

The AG also noted Virginia's Retail Franchising Act, which separately defines "franchise" and "franchisee." That separate statutory treatment signals that the General Assembly views franchises as a distinct form of business enterprise, not just ordinary employment.

One important caveat: the AG warned that this analysis applies to typical franchise arrangements. If an employer were to "mask" a real employer/employee relationship by using franchise labels to evade the misclassification statute, a court applying the ABC test could look past the label and find the relationship is in reality one of employer/employee. The label doesn't insulate the practice.

Currency note

This opinion was issued in 2011. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Whether Virginia ultimately enacted SB 34 or some version of it, and what the current state of worker misclassification law looks like, requires checking the current Title 40.1 statutes. Virginia did later enact worker misclassification provisions (e.g., § 58.1-1900 series), but anyone evaluating a current franchisee classification should consult current statutory text and case law.

Common questions

What is the ABC test?
A three-part test used in many states to determine whether a worker is an independent contractor or an employee. Under the test, the worker is presumed to be an employee unless the hiring entity can prove (A) the worker is free from control, (B) the service is outside the entity's usual business, and (C) the worker is customarily engaged in an independent trade. All three must be satisfied. Some states use stricter variations.

Why doesn't the ABC test fit franchise arrangements?
Because franchise relationships are structurally different from employment. The franchisee owns and operates its own business, pays the franchisor (rather than receiving payment), and is usually a separate corporation. The test was designed to distinguish W-2 employees from 1099 contractors, not to address structurally distinct business arrangements.

Could a franchise actually be a disguised employment relationship?
Yes, in theory. If a "franchisor" exerts ordinary employer-level control over a "franchisee" and the franchisee does what the franchisor's own employees would otherwise do, a court might look past the franchise label. The opinion's caveat is that the label alone doesn't insulate the relationship from the ABC test.

Why does franchise misclassification matter?
If a franchisee were reclassified as an employee, the franchisor would be on the hook for employment taxes, workers' compensation, unemployment insurance, and various labor law obligations. The bill's purpose was to capture employers misclassifying workers as contractors. Sweeping franchises into that net would have made many franchise businesses non-viable.

Did the General Assembly enact SB 34?
The opinion was responding to a bill that was still under consideration. Whether and how Virginia ultimately addressed worker misclassification is a separate question. Anyone working with a current Virginia classification question should check the current statutory framework.

Background and statutory framework

The proposed bill (S.B. 34, 2010):

• Would have created § 40.1-28.13.
• Defined "employer" broadly to include any person or group acting in the interest of an employer.
• Defined "performing services" as "the performance of any task related to the business engaged in by an Employer."
• Imposed the three-part ABC test.
• Applied to Titles 40.1, 60.2, and 65.2.
• Imposed civil and criminal sanctions for misclassification.

The franchise context:

• The opinion quotes a definition of a franchise as "a commercial arrangement between two businesses which authorizes the franchisee to use the franchisor's intellectual property and brand identity, marketing experience, and operational methods."
• The opinion states that in 2005 franchised businesses employed over 330,000 individuals in Virginia and generated $26.8 billion of economic activity.

The Retail Franchising Act:

• The opinion notes that the Retail Franchising Act "specifically defines the terms 'franchise' and 'franchisee,'" treating franchises as a distinct form of business enterprise. The body references the Act by name without section numbers.

The AG's reading: when one statute (the Retail Franchising Act) already addresses franchises as a distinct enterprise, the General Assembly does not casually rewire that relationship through a generic worker classification statute. The plain text of SB 34 doesn't exclude franchises, but the application of the ABC test naturally excludes them. Caveat: disguised employment relationships dressed up as franchises remain vulnerable.

Citations

• Va. Code § 2.2-505
• Va. Code Ann. § 40.1-28.13 (proposed)
• S.B. 34, 2010 Reg. Sess. (Va. 2010)
• Retail Franchising Act (referenced by name in the opinion, no section numbers given)

Source

• Landing page: https://www.oag.state.va.us/annual-reports-opinions/official-opinions
• Original PDF: https://www.oag.state.va.us/files/Opinions/2011/10-111-LeMunyon.pdf

Original opinion text

COMMONWEALTH of VIRGINIA
Office of the Attorney General
Kenneth T. Cuccinelli, II
Attorney General

January 25, 2011

The Honorable James M. LeMunyon
Member, House of Delegates
P.O. Box 220962
Chantilly, Virginia 20153-0962

Dear Delegate LeMunyon:

I am responding to your request for an official advisory opinion in accordance with § 2.2-505 of the Code of Virginia.

Issue Presented

You ask whether the proposed Worker Misclassification Act, S.B. 34, would apply to franchises, and if so, whether it should be read to categorize franchisees as "employees" rather than independent contractors.

Response

It is my opinion that S.B. 34 does not exclude franchises from its terms, but the application of its test would exclude typical franchises from its scope.

Applicable Law and Discussion

S.B. 34, titled the Worker Misclassification Act, was proposed during the 2010 General Assembly and continued to 2011. It would establish a new Code section, § 40.1-28.13. S.B. 34 defines an "Employer" as "any individual, partnership, association, joint stock company, corporation, business trust or any other person or groups of persons acting directly or indirectly in the interest of an employer in relation to an employee." Furthermore, the bill defines "'Performing Services' [as] the performance of any task related to the business engaged in by an Employer."

The bill sets forth a test for employee status commonly referred to as the "ABC test":

For the purposes of this title, Title 60.2, and Title 65.2, if an individual performs services for an employer for remuneration, that individual shall be considered an employee of the party which pays that remuneration unless and until it is shown to the satisfaction of the Department that:

1. The individual has been and will continue to be free from direction and control of the employer, both under his contract of service and in fact;
2. The service is outside the usual course of the business of the employer; and
3. The individual is customarily engaged in an independently established trade, occupation, profession, or business, both under his contract of service and in fact.

B. The failure to withhold federal or state income taxes or to pay unemployment compensation contributions or workers' compensation premiums with respect to an individual's wages shall not be considered in making a determination under this subsection A.

C. In making determinations under subdivision A 1, employee status will be found where the control exercised by the party paying remuneration is a general one, exercised directly or indirectly, over the physical activities of the purported employee and need not extend to all the details of the physical performance of the duties performed for the employer.

The bill imposes various civil and criminal sanctions for employers who misclassify employees.

"[A] franchise is a commercial arrangement between two businesses which authorizes the franchisee to use the franchisor's intellectual property and brand identity, marketing experience, and operational methods." As you note, the impact of this legislation on franchise operations is a question of no small significance, given the importance of franchising to Virginia's economy. In 2005, franchised businesses employed over 330,000 individuals in Virginia and generated $26.8 billion of economic activity.

You first inquire whether this bill applies to franchises. S.B. 34 expressly provides that it applies to "this title," meaning Title 40.1, covering labor and employment, "Title 60.2," covering unemployment compensation, and "Title 65.2," which covers workers' compensation. By its plain text, the bill does not exclude franchises from its scope. Statutes should be construed according to their plain language. Furthermore, "[t]he duty of the courts is 'to construe the law as written.'" Moreover, "[c]ourts cannot add language to the statute the General Assembly has not seen fit to include. Nor are they permitted to accomplish the same result by judicial interpretation. Where the General Assembly has expressed its intent in clear and unequivocal terms, it is not the province of the judiciary to add words to the statute or alter its plain meaning." Therefore, whether a franchisee would be treated as an employee must be determined by application of the three-part test on a case-by-case basis.

Application of the three-part test, in general, would exclude franchisees from the scope of S.B. 34. To begin with, the franchisee is not performing services "for an employer." Rather, the franchisee, upon reaching agreement with the franchisor, is performing services for the profit and account of the franchisee. In addition, unlike the ordinary contract of employment, the franchisee is not being remunerated by the franchisor. Instead, it is the franchisee who pays the franchisor for the privilege of using a trademark and business system. I also note that the typical franchisee is not an "individual" but a corporation. Consequently, application of this test to typical franchise agreements would result in the exclusion of franchisees and franchisors from the scope of this statute.

I also note that the Retail Franchising Act specifically defines the terms "franchise" and "franchisee" in the Retail Franchise Act. This separate treatment of franchises indicates that the General Assembly understands that franchises are a distinct form of business enterprise and bolsters the conclusion that Virginia law does not view typical franchise relationships as an ordinary employer/employee relationship.

Conclusion

Accordingly, it is my opinion that S.B. 34 does not exclude franchises from its terms, but the application of its test would exclude typical franchises from its scope.

With kindest regards, I am

Very truly yours,

Kenneth T. Cuccinelli, II
Attorney General