Thursday, April 2, 2015

Janitorial Franchises - Is it just a Job?

It is seldom that I "call-out" an entire category of franchised businesses but commercial janitorial franchises have grabbed my attention. And not because I believe they offer a great investment opportunity.

To the contrary, I am calling them out because low-cost commercial janitorial franchises raise a number of concerns. Of course, I cannot paint a dire picture of every buyer of these franchises (and I am sure there are successes) but, based on my experience with a number of clients, I must say there are grounds for caution.

And apparently the State of California and others agree with me. California has published the California Brochure on Buying a Janitorial Services franchise. I have never seen a state focus on an industry like this. And, the typical structure of janitorial franchises and the perceived "unfairness" have spawned a number of creative lawsuits.

With some janitorial franchisee clients I have seen:
  • sales made without disclosure documents being provided
  • poorly drafted franchise agreements
  • assigned accounts drying up shortly after start-up
  • franchisor control over accounts and receivables 
  • high royalty or "administrative" fees, and 
  • non-payment by the franchisor or sub-franchisor to franchisees on collections
Typically, the folks who buy these franchises cannot afford to hire a lawyer, have no business background, are minority individuals or new to the country and really just want a job. But, the buyers have one thing in common: they are hard-working individuals trying to get ahead. To some degree, I believe this makes them more vulnerable to the lure of these low-cost investments.

Unlike other franchise opportunities where franchisees are trained, set-up with a location and given operational control - janitorial franchisees do not control their accounts or paydays. The usual set-up is that the franchisor gets the accounts, bills the accounts and collects the accounts. The franchisee does the grunt work and looks to the franchisor - not the customer - for its "pay." Is this a business or a job?

This system of "franchisor controlled customers and proceeds" has led some courts to declare these janitorial "franchisees" to be "employees" rather than "independent contractors." The case of Awuah v. Coverall ultimately led to numerous court proceedings and a settlement after a lower court in 2013 rendered a $4.8 million judgment against Coverall.

The reason these types of suits occur is that lawyers seek creative ways to challenge franchise abuses when traditional approaches fail or may be economically impractical. (Did this trigger the current NLRB's General Counsel's opinion that franchisors may be "joint employers" of franchisees's employees? Click here for a related post)

Bottom line: Buyers should proceed with great caution. Janitorial franchise systems should clean-up their act and the International Franchise Association and other franchise systems should pressure them to do so - they are giving franchising a black eye!

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