The Massachusetts Supreme Judicial Court has ruled in favor of plaintiffs, purportedly “franchisees,” who were misclassified as independent contractors by defendant Coverall North America, Inc. (Coverall), allowing plaintiffs to recover various fees and other deductions from their payments that were paid to or made by Coverall.

By way of background, the plaintiffs were individuals who entered into contracts called “janitorial franchise agreements” with Coverall for the provision of commercial janitorial services to third-party customers. Under these contracts, the plaintiffs would provide janitorial services to third-party customers after completing a mandatory training program and paying an initial “franchise fee” (to secure the customer accounts). In addition, the contracts required the plaintiffs to pay monthly royalty fees to cover the costs of certain insurances (including workers compensation insurance) and to purchase supplies and equipment. Lastly, the contract provided that Coverall would advance payments to the plaintiffs on the customer receivables, but if the customer did not pay Coverall within a certain period of time, then the plaintiffs would have to repay Coverall the advance.

The United States District Court for the District of Massachusetts (District Court) earlier ruled that Coverall misclassified the plaintiffs as independent contractors (franchisees), as they were in fact “employees.” In so doing, the District Court then asked the Supreme Judicial Court to certify questions of Massachusetts Law to determine what damages the plaintiffs would be entitled to recover from Coverall.

In reviewing the facts and applying Massachusetts law, the Supreme Judicial Court concluded, inter alia, that:

  • The “accounts receivable financing” scheme improperly deferred payment of the plaintiffs’ earned wages, as an employee is entitled to prompt and full payment of wages due with the time specified by the Massachusetts wage statute; and
  • Under Massachusetts law, an employer may not deduct costs of worker’s compensation insurance and liability-focused insurances (absent an adjudication of the employee’s fault) from an employee’s earned wages and that an employer and employee may not lawfully agree otherwise.

The Supreme Judicial Court gave additional guidance to the District Court on whether Coverall could deduct the “franchise fees” from the plaintiffs’ wages. The Supreme Judicial Court viewed these “franchise fees” as a requirement of the plaintiffs to essentially buy their jobs from Coverall and concluded that such requirement was void as a violation of public policy, thereby entitling the plaintiffs to recover the paid fees from Coverall as damages incurred.

The Supreme Judicial Court was not asked to and thus did not address other significant liabilities that can arise from misclassification, including, among others, those arising from a failure to withhold or pay income, FICA and unemployment taxes.

The rulings in this case should be looked at carefully by franchisors and other employers which might follow the same or similar models.