Contributed by Tom Kent
In Massachusetts and elsewhere, the debate continues with respect to whether a franchisee is properly classified as an employee or an independent contractor. Last year, in Awuah v. Coverall North America, Inc., the Massachusetts District Court ruled that Coverall’s franchisees were misclassified as independent contractors and should be classified as employees (as employees have numerous rights and protections in addition to those contracted for in the franchise agreement). In response to the Coverall ruling, there is pending legislation in the House of Representatives of Massachusetts that clarifies that franchisees are not employees of the franchisor. The proposed bill states, in part, that “an individual who owns a franchise, or is a party to a franchise agreement under which he or she is authorized to sell products and/or services (a) in accordance with prescribed methods and procedures; and (b) under services marks, trademarks, trade names and other intellectual property licensed under such agreement, shall not be considered an employee of the franchisor.” While passage of the House Bill would be a win for franchisors, the consensus seems to be that passage is unlikely.
Another development apparently stemming from the Awuah case is Massachusetts Senate Bill 1843. The Bill, in its present form, is one of the more aggressive pro-franchisee proposed laws pending in the U.S. The Senate Bill, if passed, would (i) prohibit a franchisor from terminating a franchisee (including nonrenewal of a franchisee) without “good cause” and (ii) require 90 days notice prior to any termination. Additionally, if a franchisor develops a new outlet or location that has an “adverse impact” on the gross sales of an existing franchisee, the franchisor may be held liable to the affected franchisee for monetary damages.
Lastly, upon the termination of a franchisee, for whatever reason except abandonment and/or voluntary relinquishment, a franchisor may be liable to compensate the franchisee for the fair market value of the franchisee’s inventory, supplies, equipment and furnishing purchased by the franchisee from the franchisor and for good will provided that compensation for good will is not required if the franchisor agrees not to enforce restrictive covenants. As one would expect, the Senate Bill has been received well thus far by the franchisee community in Massachusetts. However, we would be very surprised to see this proposed Bill as currently drafted become law due to some of the rather extreme remedies that it contemplates. We will keep our eyes on the development of these proposed laws and provide updates with any new developments.