Treating Franchisee as Independent Contractor Violated Workers’ Compensation, Wage Laws

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

A franchisor of janitorial cleaning businesses violated Massachusetts law by improperly requiring the franchisee-employee to pay for insurance and by failing to pay the franchisee-employee within a week of the pay period during which the wages were earned, a federal district court in Boston has determined. A group of the franchisees filed suit against the franchisor as representatives of a putative class action.

Misclassification

In an earlier ruling (Business Franchise Guide¶14,349), the court held that the franchisor had misclassified the franchisees as independent contractors.

The franchisee-employee argued that five categories of fees were improperly withheld from his wages by the franchisor due to this misclassification, despite the fact that he agreed to those fees in his franchise agreement. The five categories were:

(1) Franchise fees;

(2) Royalty and management fees;

(3) Insurance;

(4) Supplies and equipment; and

(5) Chargebacks—fees charged by the franchisor to its cleaning workers when a customer did not pay its bill for cleaning services.

Damages

The franchisor argued that the franchisee-employee was entitled only to damages incurred directly from the misclassification and that the fees were not directly related to the misclassification because they were the result of a freely undertaken contractual obligation.

The franchisor was correct that damages incurred must relate to the classification; however, there were certain statutory costs that a Massachusetts employer must bear, the court noted. Under Massachusetts law an employer was required to contribute to workers’ compensation insurance in the event that an employee was injured on the job. Had the franchisor provided the franchisee-employee with its statutorily mandated workers’ compensation insurance, the franchisee-employee would not have had to purchase the extensive liability insurance required by the parties’ agreement.

To the extent that the franchisee-employee paid premiums for insurance that the franchisor was statutorily required to provide, the franchisee-employee was damaged by his misclassification, the court ruled.

Similarly, the franchisor’s use of chargebacks was an attempt to circumvent the Massachusetts Wage Act. Under the parties’ agreement, the franchisor "advanced" wages to the franchisee-employee after he provided cleaning services, but did not consider the wages earned until the customer paid its bill.

The franchisee-employee had completed his job when he had performed all of the cleaning services that it required. At that time, he earned his wage. To impose an additional contingency of payment from a customer on the franchisee-employee, particularly where he had no involvement in collecting the payment, was an improper attempt by the franchisor to exempt itself from the Wage Act, the court held.

Although the franchisor improperly withheld chargebacks from the employee, all such wages were subsequently repaid. Nonetheless, such repayments were made after the statutory period. Thus, the franchisee-employee was entitled to interest on the chargebacks prior to their repayment.

Public Policy Towards Franchising

The franchisor’s system of doing business pursuant to which the franchisor would bill the cleaning clients and then remit payment to its franchisee-employees was not unlawful as against public policy under Massachusetts law, the court ruled.

The franchisee-employee plaintiff pointed out that the franchisor’s system of doing business was essentially to charge employees for performing work. The franchisee-employee argued that, although the Massachusetts legislature had not spoken on the issue, such a system must be against public policy in Massachusetts and that, at least in the cleaning industry, a franchise system must be unlawful. However, such a public policy argument required some indication from the Massachusetts legislature, executive, or judicial branches that the system was unlawful, according to the court.

Instead, there was no indication from any branch of the government that the franchise distribution system was disfavored. Indeed, the franchisor pointed to numerous statutes that appeared to condone a franchise distribution system, the court noted.

The decision is Awuah v. Coverall North America, Inc., CCH Business Franchise Guide ¶14,473.