Purchaser of Janitorial Business Franchise Was “Employee”

This posting was written by Pete Reap, editor of CCH Business Franchise Guide.

The purchaser of a janitorial business franchise, whose relationship with a franchisor differed in key respects from the typical franchise relationship, was not an independent contractor or even a franchisee, but was an “employee” under the meaning of the Massachusetts unemployment compensation law, the Massachusetts Supreme Court has ruled. Thus, the franchisor, Coverall North America, Inc., was required to pay contributions for the purchaser’s reported earnings, pursuant to the unemployment insurance statute. A Massachusetts trial court’s ruling—upholding a determination by what was then the Massachusetts Division of Employment and Training’s Review Board—was affirmed.

BACKGROUND

In the “start-up phase” of a franchise relationship, Coverall typically provided new franchisees with extensive training. In addition, new franchisees were given an initial customer base and allowed to solicit prospective customers directly, according to the court. If a franchisee established a new customer, that customer was required to sign a contract with Coverall. Every month, Coverall directly billed all customers and paid its franchisees for the services rendered to those customers, taking deductions for finance charges, royalties, and management fees.

The claimant originally began working at a Massachusetts nursing home under the direction of another of Coverall’s franchisees. Shortly thereafter, the franchisee lost its account with the nursing home, although Coverall retained its contract with the home. The claimant then inquired into the possibility of becoming a franchise owner with Coverall in order to continue her position there and became a franchise owner. The claimant purchased a franchise from Coverall, paying the franchisor $3,800 in cash and agreeing to pay an additional $6,700 towards the cost of the franchise. The claimant was then given the nursing home’s account, which required her to work at the home for 25 hours each week and for which she would receive $1,485 per month, subject to deductions for management fees, royalties, and costs.

Pursuant to its usual practices, the franchisor negotiated the contract with the nursing home directly and billed it directly, without any involvement of the claimant. If the nursing home had a complaint about the claimant’s service, it would be submitted directly to the franchisor. The claimant lacked any of her own business cards and failed to solicit any new customers of her own, the court noted. Additionally, the claimant’s daily tasks were given to her by a representative of the nursing home who closely supervised both her work and her arrivals and departures. In addition, the claimant was supervised by one of the franchisor’s field consultants.

After a dispute arose over the amount of work assigned to the claimant and the lack of additional pay for additional duties, the claimant refused to perform additional tasks that were periodically assigned to her. An examiner from the Division of Employment and Training subsequently found that the franchisor “discharged” the claimant over this dispute and the claimant filed for unemployment benefits.

UNEMPLOYMENT LAW

In order to be exempted from the requirement of contributions to the unemployment compensation fund, an employer was required to establish under Massachusetts law that the individual providing services was an independent contractor. To meet that burden, the employer was required to show “that the services at issue are performed: (a) free from control or direction of the employing enterprise; (b) outside of the usual course of business, or outside of all the places of business, of the enterprise; and (c) as part of an independently established trade, occupation, profession, or business of the worker."

ANALYSIS AND DECISION

Coverall could not satisfy its burden of proving the third prong of the test because the claimant did not operate an independent business apart from Coverall, the court ruled. Therefore, it was not necessary to determine whether or not Coverall could satisfy the first two prongs of the test.

The parties’ agreement required the claimant to allow Coverall to negotiate contracts and pricing directly with clients, bill clients, and provide a daily cleaning plan to which the claimant was required to adhere, the court commented. Thus, the claimant was compelled to rely heavily on Coverall, the court decided.

In support of its conclusion that the claimant did not operate a business independent from Coverall, the Review Board found that the claimant cleaned only at locations specified by Coverall and was given a plan and directions by Coverall supervisors. The franchisor contended that the agency incorrectly focused on what the claimant actually did with her franchise instead of what she was capable of doing. Essentially, Coverall argued that, even though the claimant did not take advantage of the entrepreneurial opportunities afforded her by her agreement such as soliciting new customers and hiring employees, she was still an independent contractor by virtue of her capability to expand her business.

However, even if the claimant was capable of expanding her business, it was undisputed that the growth of her business inevitably expanded Coverall’s business, as each new client became a Coverall client, the court observed. Even though Coverall argued that the claimant was not compelled to depend on it because she had been in the cleaning business for six years prior to becoming a “franchise owner,” the claimant testified that her business subsequently ended once Coverall “discharged” her. Because the agency’s decision incorporated all of these facts, there was substantial evidence supporting its conclusion that the franchisor failed to establish that claimant’s business was independent of it under the third prong of the test, the court held.

Finally, although the Supreme Court specifically stated in a footnote that the claimant was not a franchisee, it added in another footnote that its conclusion did not reflect a determination concerning the nature of other Coverall contracts beyond the agreement at issue between the parties in the instant dispute.

The December 12, 2006 opinion in Coverall North America, Inc. v. Commissioner of the Division of Unemployment Assistance, will appear in a forthcoming issue of the CCH Business Franchise Guide.