Earlier this week, the Supreme Judicial Court (SJC) of Massachusetts in Awuah v. Coverall North America, Inc., clarified and reiterated that Massachusetts employment laws apply to employees improperly classified as independent contractors. Moreover, the SJC held that employers and franchisors cannot require employees to pay for insurance premiums or “franchise fees” as conditions of employment. Coverall will have a huge impact on Wage Act claims, particularly in franchisor-franchisee disputes, because misclassification of employees as independent contractors will cost employers handsomely.

Awuah v. Coverall North America, Inc.

In March 2010, the United States District Court of Massachusetts found that Coverall, a janitorial cleaning service franchisor, improperly classified its franchisees as independent contractors rather than employees. Coverall had a number of agreements with its franchisees pertaining to fees and payment of wages. For example: 1) an “accounts-receivable financing” program provided that Coverall would pay the franchisee interest free advances for amounts billed to customers but not yet received, and if the customer failed to pay Coverall within 90 days of the payment due date, the franchisee had to repay Coverall’s advance; 2) the franchisee had to pay initial “franchise fees” of several thousand dollars to secure a package of customer accounts; and 3) the franchisee was responsible for paying insurance premiums on a number of policies including workers’ compensation and janitorial bonding. Because these claims presented issues of Massachusetts statutory law, the federal judge handling the case certified a number of questions to the SJC for further analysis and interpretation. The highlights of the SJC’s opinion are discussed below, but it is very important to note, and the SJC made sure to reiterate, that the answers to these certified questions “have no application to properly classified independent contractors operating under franchise agreements.” Thus, the following analysis only applies to workers who are properly classified as employees, or improperly classified as independent contractors.

Forfeiting Financing Agreements and Franchise Fees

Coverall argued that the accounts-receivable financing agreements were a benefit to its employees in that it advanced compensation not yet due to them by allowing them access to funds when customers failed to pay their bills on time. The SJC refused to adopt Coverall’s argument, holding that the Wage Act, by its clear and definite terms, requires employers to pay employees their wages within a fixed period of time after the close of the pay period during which the wages were earned. Additionally, the Wage Act clearly prohibits special contracts creating exemptions from its provisions. The SJC held that Coverall’s accounts-receivable financing agreements constituted special contracts, and thus, were unenforceable. An employee has earned his wage when the employee has completed the labor or service required of him - just because a customer has not paid its bill to the employer does not affect the employee’s right to earned wages, the SJC reasoned.

Furthermore, the SJC held that the franchise fees which Coverall charged its employees constituted an unenforceable special contract. In substance, the fee agreement allowed Coverall to make its employees “buy their jobs”- a concept which violates public policy. Moreover, to the extent that such fees were reimbursed to Coverall in the form of deduction of wages, the SJC found that they represent a prohibited assignment of future wages. As a consequence, the franchise fees were classified as damages under the Wage Act.

Putting the Premium on the Employer

Additionally, the SJC rejected Coverall’s argument that the Workers’ Compensation Act did not prohibit Coverall from passing along the cost of workers’ compensation insurance premiums to its employees - it argued that the Workers’ Compensation Act only mandated that Coverall make the insurance available. Calling Coverall’s argument meritless, the SJC recognized that the Workers’ Compensation Act was enacted to classify the cost of personal injuries as incidental to employment, and thus, made the insurance premium a business expense of the employer. The court reiterated that the obligation to secure the insurance is on the employer alone, and the employer’s responsibility for payment is made clear by the Act’s provisions which impose criminal penalties on those who attempt to evade its requirements.

Moreover, the court held that other insurance premiums incidental to Coverall’s business - janitorial bonding and comprehensive liability - must also be paid by Coverall. The SJC noted that these types of insurance are intended to protect against the risks of damage to the property of the employer or a third-party. While an employee might ultimately be liable to the employer for damages, the employee must first be afforded the right to a fair adjudication of his responsibility, and Coverall’s method of deducting liability insurance costs from its employees’ wages improperly placed the blame on the employee before any such adjudication occurred. The SJC opined that “an employer may not deduct insurance costs from an employee’s wages where those costs are related to future damages that may never come to pass, and even if they do, may not be the responsibility of the employee.” Any such deduction was found to constitute damages under the Wage Act.

Avoiding a Messy Situation

Fortunately for the company, Coverall began in 2007, prior to the 2008 enactment of the Wage Act’s mandatory treble damages provision. Consequently, any action similar to Coverall filed after 2008 could be extremely expensive for employers. To avoid such exposure,

  • All employers and franchisors must be aware that even if their workers are classified as independent contractors, they may legally be considered employees. If so, the employers and franchisors must adhere to Massachusetts law pertaining to employees - which includes the Wage Act.
  • Any agreements which seek to alter the payment of wages as proscribed in the Wage Act are unenforceable.
  • Employers and franchisors cannot mandate that their employees pay business costs such as franchise fees. It may constitute a violation of the Wage Act and could subject the employer or franchisor to mandatory treble damages.
  • Employers and franchisors cannot force their employees to pay insurance premiums incidental to their employment, such as janitorial bonding, or workers compensation premiums.