Monday, September 26, 2011

Massachusetts Labor Laws Clarified for Franchising Context

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

The Massachusetts Supreme Judicial Court has answered four questions that were certified to it by a federal district court for the District of Massachusetts in a dispute between Coverall, a franchisor of janitorial service businesses, and individuals who entered into janitorial franchise agreements with Coverall.

The federal court had determined in earlier rulings that those individuals who were Massachusetts residents were employees who had been improperly classified as independent contractors by the franchisor. The certified questions related to the calculation of damages for one of the individual plaintiffs in the action.

The first two questions were related and asked:

(1) Whether, under Massachusetts law, a franchisor could lawfully use customer accounts-receivable financing to pay a franchisee who is characterized as an employee under the Massachusetts Wage Act; and

(2) Whether an employer could lawfully withhold wages to an employee if the employer and employee agree that such wages are not earned until a customer remits payment.

The answer to both questions was "no," according to the Massachusetts high court.

The contracts between the parties required the individual to:

(1) Pay an initial franchise fee;

(2) Pay monthly royalty and management fees;

(3) Maintain janitorial bonding, workers’ compensation insurance for himself and any employees, unemployment insurance as required by law, and comprehensive liability insurance, all policies naming Coverall as an additional insured; and

(4) Provide replacement supplies and equipment.

The contract further provided for accounts receivable financing whereby Coverall would pay the individual interest-free advances for amounts billed to, but not yet collected from customers. If a customer failed to pay within 90 days, the individual was required to repay Coverall the advance in the form of a chargeback.

Wage Act

The Massachusetts Wage Act required an employer to pay the wages earned to an employee within a fixed period of days after the end of a pay period, according to the court. Where an employee has completed the labor, service, or performance required of him, by common understanding he has "earned" his wage.

That a Coverall customer did not pay its bill within a week after the pay period did not affect the plaintiff individual’s right to wages he had earned. Since the individual was an employee, the obligation to pay him earned wages rested with Coverall, not with third parties, the court held.

The accounts receivable financing system incorporated into the individual’s contract with Coverall, in which wages were classified by Coverall as advances that could be recouped, violated the special contracts provision of the Wage Act, the court ruled. That provision prohibited a person from exempting himself from the Wage Act’s provisions by a special contract or other means. Coverall was not free to withhold, much less recapture, the employee’s earned wages.

In answering the remaining questions, the Massachusetts court determined that the employees could recover as damages incurred any insurance premiums that they were obliged to pay to Coverall under the terms of their contract. In light of the federal district court judge’s statement that he welcomed other advice about Massachusetts law that was relevant to the case, the court addressed the franchise fees that the individual agreed to pay Coverall in order to enter into what the district court determined to be a direct employment relationship. The Massachusetts court’s view was that such fees constituted "special contracts," not usual between employers and employees.

In substance they operated to require employees to buy their jobs from employers. In that respect, they violated public policy. Examined in the context of the Wage Act, the franchise fees paid by the plaintiff individual did not represent a clear and established debt. To the extent that such fees were paid back to Coverall out of wages earned from Coverall, they represented a prohibited assignment of an employee’s future wages to his employer, the court opined.

The court emphasized that its concerns over franchise fees related to the potentially exploitative nature of payments by an employee to an employer for the purpose of securing employment and noted that it expressly did not conclude that franchise fees violated public policy when they were agreed to by parties who were not in an employer-employee relationship.

The opinion is Awuah v. Coverall N.A., Inc., CCH Business Franchise Guide ¶14,671.

Further information regarding CCH Business Franchise Guide appears here.

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