In a closely-watched case in Massachusetts, the District Court in that state recently issued a preliminary ruling that franchisees were considered employees of the franchisor, as opposed to independent contractors. Franchisors should closely review their franchise disclosure documents, franchise agreements, and marketing materials in light of this recent decision.
In Awuah v. Coverall North America, Inc., Coverall franchisees brought a claim alleging that Coverall, the franchisor, misclassified its franchisees as independent contractors and committed unfair or deceptive trade practices. Most states adopt a three-part test in order to determine whether an individual providing services is an employee or an independent contractor, and putative employers need only show that one prong of the test is satisfied to classify an individual as an independent contractor. However, under Massachusetts law, individuals performing services are classified as employees if the putative employer cannot meet all of the following tests:
(1) the individual is free from control and direction in connection with the performance of the service (in contract and in fact);
(2) the service is performed outside the usual course of the business of the employer; and
(3) the individual is engaged in an independently established trade or business of the same nature involving the service performed.
The court made its decision solely on the second prong of the analysis, finding that Coverall did not prove that it is in a different business than that of its franchisees. Coverall argued that its business is different than that of its franchisees as it is in the business of franchising, while the franchisees are in the cleaning business. However, the court found that because Coverall spent time, skill, effort and money training franchisees, providing them with uniforms and identification badges, contracting and billing with customers, and receiving royalties on the services that the franchisees provide, Coverall sells cleaning services, the same services provided by its franchisees.
As a result, the plaintiff franchisees were found to be employees in Massachusetts. The implications of this decision mean that the franchisor may be liable for unpaid wages and benefits, including health insurance, worker's compensation, overtime pay, insurance, FMLA, and many other rights afforded to employees that are not similarly provided to independent contractors.
In light of this decision, the International Franchise Association has begun lobbying the Massachusetts Legislature to amend the law to recognize franchising as a distinct business model. However, franchisors should carefully examine their franchise agreements, disclosure documents, and marketing materials, and consider ways in which to separate the franchisor's business from that of the franchised business, including the manner in which the franchisor provides support to its franchisees.
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