Contributed by Christina Stoneburner
As many franchisors are aware, recently, the legal landscape became a little scarier and more uncertain for franchisors. Generally speaking, one of the major advantages of being a franchisor is that the business and brand name can be branched out into other regions and states without the overhead costs associated with the hiring of employees to staff all of those locations. Another major advantage is that under most state and federal employment and anti-discrimination laws, only employees of the franchisor are entitled to protection from the laws.
The case of Awuah v. Coverall North America, Inc., Civil Action 07-10287-WGY (D. Mass. March 23, 2010) sent chills through the franchising community when the court found that the franchisor could be deemed the employer of the franchisee’s employees. The Court overlooked many factors that would lead to the conclusion that the franchisor could not be the employer of the franchisee’s employees. Instead, the court focused on one factor of Massachusetts’ independent contractor statute, which is similar in some respects to approximately 25 other states’ independent contractor statutes.
The Massachusetts statute has a three-prong test as to whether an individual is an independent contractor:
- the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and
- the service is performed outside the usual course of the business of the employer; and,
- the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed. See Mass. Gen. Laws Ch. 149, § 148B. Notwithstanding the fact that Coverall itself never engaged in any cleaning services, the court held that Coverall was in the business of providing cleaning services, the same as its franchisees. Under the Awuah court’s reasoning, and possibly where the state statute is similar to that in Massachusetts, it is difficult to imagine a scenario when the franchisor would be able to establish that its franchisees were independent contractors, not employees.
Logic somewhat prevailed at trial when the trial court dismissed the allegations that the plaintiffs should have been classified as employees of the franchisor. However, franchisors should be cautiously optimistic as the dismissal of the claims was based on the fact that there was no proof of damages resulting from the misclassification, and not that the plaintiffs could not be deemed employees of the franchisor. It remains to be seen how expansively the Awuah case will be applied by other courts.