Despite the focus in recent years on the misclassification of employees as contractors, unfortunately, we continue to see numerous companies ranging from the Fortune 500 to startups make mistakes, albeit mostly unintentional, with their use of “contractors.” Generally, these mistakes are because of misunderstandings (“We agreed to do it this way.”), myths (“She works two jobs. I heard that makes her a contractor”), and the realities of running a growing business: monitoring classification compliance is pretty low on the to-do list. However, this is an area of law that is not going away any time soon. It remains a high priority for the Department of Labor and provides big pay days when employers slip up, as evidenced by the $600,000 that an Arizona drywall company shelled out for misclassifying workers as “member/owners.” That settlement and a recent complaint in the Northern District of Illinois scheduled to be answered this week (barring an extension) caught my eye and made me wonder about all of the ads for franchises that I hear on my satellite radio: Could franchisees be the next independent contractor misclassification?
In a complaint filed earlier this spring, the plaintiff claims that he, along with a class of at least 100 others, were induced to sign exploitative “franchise agreements” with CleanNet USA and its Illinois affiliate. In the complaint, the plaintiffs allege that these agreements were fraudulent and unlawful, and that they violated both the FLSA and the Illinois Minimum Wage Law (IMWL) in several respects.
The theory of the complaint is that the franchise agreement combines elements of misclassification as to independent contractor relationships and aspects of debt bondage from the “company store” model, abuses immortalized in the song “Sixteen Tons” written by Merle Travis and made famous by Tennessee Ernie Ford(yes, I’m just a little bit of a country music fan, as those who have read my Firm bio already know). CleanNet allegedly charges a large fee to each new “franchisee,” but lends them the money to pay for the fee, which it then requires “franchisees” to pay back at a high rate of interest. The complaint alleges that this makes the worker “unable to leave the employment relationship without significant loss.” The plaintiffs also allege that CleanNet compounds things by targeting immigrant communities with promises of a guaranteed amount of income, and then persuades them to enter into a one-sided contract that is written in English, not their native language.
According to the complaint, CleanNet makes the “franchisees” further dependent on the company by controlling new client contacts, business investments, and sales practices, and by socking “franchisees” with fees and costs. The company promises a “guaranteed customer base within a few months,” but the plaintiffs allege that the company begins directing business to new “franchisees” almost right away, taking business away from existing franchisees, leaving them with little hope of earning enough to pay back their franchise fees, much less earning the minimum wage. The plaintiffs claim that the result is that CleanNet gets “a national workforce of sub-minimum wage cleaners denied overtime wages and who are dependent on and often in debt to CleanNet.” By misclassifying its workers as “franchisees” (and, therefore, independent contractors), the complaint alleges that CleanNet failed to guarantee a minimum wage or to pay overtime, and that the various fees and costs were actually unlawful deductions from the plaintiffs’ pay. For good measure, the last count tosses in a fraudulent inducement claim, too.
But we know our readers would never try to exploit immigrants or any workers this way, so what can you take from this?
Complaints are always only one side of the story, but stripping away the allegations of exploitation, this case does serve as a good reminder that dressing up your independent contractor relationship as a “franchisee” or “consulting” agreement, or even contracting with someone’s sole proprietorship or S corporation, won’t avoid FLSA misclassification problems. As I recently tweeted:
— Doug Hass (@WageHourInsight) May 3, 2014
Furthermore, pushing your own costs out to “franchisees” or “consultants” not only can be unlawful, but, as in this case, can shine a light on lots of other potentially problematic practices that might have otherwise stayed under the radar.