A franchisor's exposure to damages because of a federal district court decision that the franchisor misclassified its franchisees as independent contractors continues to grow. Late last week, the Massachusetts Supreme Court rules that Coverall's accounts-receivable financing system and requirement that franchisees pay worker's compensation insurance premiums violates state law.

In Awuah v. Coverall N. Am. Inc., 707 F.Supp.2d 80 (D. Mass. 2010),  a case now known by almost every professional throughout the franchise industry, the Federal District Court held that Coverall misclassified its franchisees as independent contractors in violation of Massachusetts' misclassification statute and were therefore "employees".  

As a determination of damages required the interpretation of state statutory law, the judge in Awuah certified four questions to the Massachusetts Supreme Court.  The Suprme Court has now rendered its opinion, holding that Coverall was not permitted to (i) use customer accounts-receivable financing to pay a franchisee who is characterized as an employee under state law, or (ii) pass onto its franchisees who are classified as employees, the cost for worker's compensation insurance premiums. 

Under Coverall's accounts-receivable financing system, the franchisor withheld payment of fees to the franchisees until it received payment from customers.  The court found that this violated the state's Wage Act which requires the "prompt and full payment of wages due."  Since the franchisees were employees, the fact that Coverall did not receive payment from a customer does not affect the employee's right to earned wages.  The court also held that Coverall's attempt to require its franchisees pay for worker's compensation insurance premiums was impermissible because under the state's Workers' Compensation Act, the obligation to secure such insurance is on the employer.

As detailed in one of our recent posts, there is legislation pending which would clarify that franchisees are not employees.  Unless and until such legislation passes, however, franchisors operating in Massachusetts must be careful to operate their system in such a way that does not run afoul to the state's classification laws.  Otherwise, a franchisor may find itself exposed to damages for violations of the state's Wage Act and Workers' Compensation Act as well.