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September 13‚ 2011
Massachusetts Supreme Judicial Court Affirms Lower
Court Ruling in Favor of Employees Misclassified as Franchisees/Independent
Contractors
By Ivan K. Blumenthal
and Robert M. Gault
The Massachusetts Supreme Judicial Court has ruled in favor
of plaintiffs, purportedly “franchisees,” who were misclassified as
independent contractors by defendant Coverall North America, Inc.
(Coverall), allowing plaintiffs to recover various fees and other
deductions from their payments that were paid to or made by Coverall.
By way of background, the plaintiffs were individuals who
entered into contracts called “janitorial franchise agreements” with
Coverall for the provision of commercial janitorial services to third-party
customers. Under these contracts, the plaintiffs would provide janitorial
services to third-party customers after completing a mandatory training
program and paying an initial “franchise fee” (to secure the customer
accounts). In addition, the contracts
required the plaintiffs to pay monthly royalty fees to cover the costs of
certain insurances (including workers compensation insurance) and to
purchase supplies and equipment. Lastly, the contract provided that
Coverall would advance payments to the plaintiffs on the customer
receivables, but if the customer did not pay Coverall within a certain
period of time, then the plaintiffs would have to repay Coverall the
advance.
The United States District Court for the District of
Massachusetts (District Court) earlier ruled that Coverall misclassified
the plaintiffs as independent contractors (franchisees), as they were in
fact “employees.” In so doing, the District Court then asked the Supreme
Judicial Court to certify questions of Massachusetts Law to determine what
damages the plaintiffs would be entitled to recover from Coverall.
In reviewing the facts and applying Massachusetts law, the
Supreme Judicial Court concluded, inter alia, that:
·
The “accounts receivable financing” scheme improperly deferred
payment of the plaintiffs’ earned wages, as an employee is entitled to prompt
and full payment of wages due with the time specified by the Massachusetts
wage statute; and
·
Under Massachusetts law, an employer may not deduct costs of
worker’s compensation insurance and liability-focused insurances (absent an
adjudication of the employee’s fault) from an employee’s earned wages and
that an employer and employee may not lawfully agree otherwise.
The Supreme Judicial Court gave additional guidance to the
District Court on whether Coverall could deduct the “franchise fees” from
the plaintiffs’ wages. The Supreme Judicial Court viewed these “franchise
fees” as a requirement of the plaintiffs to essentially buy their jobs from
Coverall and concluded that such requirement was void as a violation of
public policy, thereby entitling the plaintiffs to recover the paid fees
from Coverall as damages incurred.
The Supreme Judicial Court was not asked to and thus did not
address other significant liabilities that can arise from
misclassification, including, among others, those arising from a failure to
withhold or pay income, FICA and unemployment taxes.
The rulings in this case should be looked at carefully by
franchisors and other employers which might follow the same or similar
models.
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