What you need to know:

A recent ruling was the first to apply the Massachusetts Independent Contractor Law to franchisees. Under Massachusetts law, workers must pass a stringent three-part test in order to qualify as independent contractors; failure to properly classify workers may lead to a triple damages award against the employer.

What you need to do:

Massachusetts companies with franchisees should familiarize themselves with the requirements of the Independent Contractor Law and consult with counsel to assess their current arrangements with franchisees to ensure that individuals are properly classified.

The decision

In Awuah v. Coverall North America, Inc., the US District Court for the District of Massachusetts found that a cleaning service company had improperly classified a group of franchisees as independent contractors under Massachusetts law.

The company at issue, Coverall, was a janitorial cleaning service business that sold franchises to thousands of franchisees across North America. Coverall required all of its franchise owners to complete mandatory training programs and wear approved uniforms and identification badges. Coverall also provided all of the initial equipment and supplies to its franchisees. Under the franchise agreement, Coverall had the exclusive right to perform billing and collection services and was entitled to management and royalty fees. Until May of 2009, Coverall also contracted directly with customers unless the customer specifically requested a direct contract with the franchisee.

In this action, a group of franchisees sued Coverall alleging that they were misclassified as independent contractors and owed wages and overtime. The court granted their motion for partial summary judgment, finding that the franchisees were in fact employees under the Massachusetts statute.

The Massachusetts Independent Contractor Act

Under the Massachusetts Independent Contractor Act, a worker is presumed to be an employee unless the employer can prove all three of the following:

  • The worker is free from the employer’s control and direction in the performance of his or her work;
  • The service provided by the worker is outside the usual course of the employer’s business; and
  • The worker must routinely work in an independently established trade, occupation, profession or business performing the same type of services that he or she is performing for the employer at issue.

If the employer can establish all three of the above prongs, only then may the worker be classified as an independent contractor.

In Awuah, the court focused exclusively on the second prong of the test, finding it dispositive. As the court explained, to satisfy the second prong of the test, Coverall would have had to establish that the franchisees were performing services that were part of an independent, separate and distinct business from that of Coverall. Coverall argued that it was in a distinct business from its franchisees because it was not in the commercial cleaning business, but rather in the franchising business. Coverall asserted that it sells franchises and trains and supports franchises, but does not actually clean any establishments nor does it employ anyone who cleans.

The court rejected Coverall’s argument, finding that franchising is not in itself a business. Instead, the court held that a company is in the business of selling goods or services and merely uses the franchise model as a means to distribute those goods in an economical manner. Additionally, because Coverall contracted directly with customers, the court found that the company sold cleaning services — the same services provided by the plaintiffs. As such, because the franchisees did not perform services outside the usual course of Coverall’s business, the company failed to establish that they were independent contractors.

Implications

For the first time, the court in Awuah has made clear that the Massachusetts Independent Contractor Act will be strictly applied to franchisees. Companies can no longer assume that the classification of workers as franchisees will shield them from misclassification claims.

Moreover, once a court makes the determination that an employer has misclassified a worker, then the plaintiff may be entitled to triple damages under the Massachusetts Wage Act for any benefits that were denied as a result of the misclassification. Since the failure to properly classify workers may lead to triple damages, Massachusetts companies would be wise to consult with counsel to assess their current arrangements with franchisees and to ensure that individuals are properly classified under the law.