Coverall Not Over on Employee Status

BOSTON – Just when franchisors thought it was safe to assume that franchisees cannot claim to be employees rather than independent contractors, attorney Gregg A. Rubenstein of law firm Nixon Peabody says not so fast. “What was clearly a franchisor win in the Awuah v Coverall North America trial is not over. The implication, which I think can be quite significant to franchise systems, is still yet to be determined,” he cautioned.

As a follow-up to the Awuah case, Rubenstein explained in the firm’s webinar last week that the suit stems from 2004 changes made to the Massachusetts statute that defines who is an employee and who is an independent contractor. He said those changes, while ostensively made to correct certain perceived issues in classification in the construction industry, generally made it more difficult to establish an independent contractor relationship. It did that by focusing on the “B” prong of the ABC three prong test. The state modified its B prong to say that if the putative employer and employee are in the same business, an employment relationship is established. The burden is on the putative employer to disprove the employment, so it is only when Coverall meets its burden on all three prongs that it has established an independent contractor relationship.

While the federal court granted partial summary judgment on liability under the independent contractor statute last March, Rubenstein stressed that it is important to understand the procedural context in which that ruling came about. “For what I can only imagine are strategic reasons plaintiffs’ counsel did not follow the normal course in pursuing a class action litigation. Normally in class action cases, the earlier step would be to seek class status, and only after a class has been certified does a plaintiff normally move for summary judgment,” he stated.

Rubenstein said the order has been reversed in the Awuah case at plaintiffs counsel’s insistence. “So first came the summary judgment motion for liability under the independent contractor statute, and the court granted that. But because the class was not certified, that ruling applies only to the four named Massachusetts plaintiffs,” he asserted.

Coverall’s explanation was, “We Coverall, the franchisor, are not in the business of providing cleaning services, rather we are in the business of selling franchises to the people who then take those franchises and perform cleaning services.” The franchisor sought to show the distinction between the two.

As a reminder, Rubenstein quoted what Judge William G. Young wrote in his decision (pdf):  

Describing franchising as a business in itself, as Coverall seeks to do, sounds vaguely like a description for a modified Ponzi scheme—a company that does not earn money from the sale of goods and services, but from taking in more money from unwitting franchisees to make payments to previous franchisees.

Rubenstein said the judge rejected fundamentally that distinction. “It was that rejection that garnered so much attention, because I think there is no principal basis upon which any franchise system could avoid that analysis. Every franchise system, in the opinion of this judge, is in the business of both franchising and selling the product or services at the heart of the franchise system,” he explained. 

He added, “Importantly, the court denied class certification even after its partial summary judgment decision to delay that ruling until after a trial on the merits for the named plaintiffs. The judge said he wanted to get a better understanding of the proofs involved in the plaintiffs’ claims before deciding whether those proofs were susceptible to class treatment.”

An Interesting Thing Happened on the Way to Trial

On the first day of trial before the jury even came into the room, Rubenstein said the judge dismissed the misclassification claims of the named Massachusetts plaintiffs for failing to provide a proper damage calculation. “What plaintiffs did was to identify specific types of damages that they sought to recover at this trial,” he told Blue MauMau. He said those types of damages were franchise fees paid, royalty fees paid, administrative fees paid, because in the Coverall system there are administrative fees paid for billing and other services the franchisor performs.

He added, “What plaintiffs did not seek to recover were the traditional wage and overtime payment damages or claims. They instead sought only the traditional contract type damages.” Rubenstein said on the basis of that and what the court deemed as the plaintiffs’ failure to comply with the court’s pretrial order to provide a damage calculation, the court dismissed the misclassification claims for the named plaintiffs. And then as a result of the trial that then proceeded, all other claims by the named plaintiffs were ultimately dismissed.

What Happens Now?

Because there had been no class certification, the damages ruling apply only to the named plaintiffs, the attorney explained. He said following trial, plaintiffs once again moved to certify a class. “They named new lead plaintiffs because the named ones had been dismissed. In naming the new plaintiffs, the counsel chose certain franchisees who had an arbitration provision in their franchise agreements. Why they did that, I can’t say.”

Rubenstein said the court then rejected the plaintiffs as lead plaintiffs. Counsel then had to find new plaintiffs. “The court then wanted to proceed to try those cases or to figure out whether to certify the class. Not surprisingly, counsel continued to object to the concept of their inability to recover franchise fees, royalty fees, and the like under their wage claims,” he added. 

The court then established a briefing schedule and last Friday was the plaintiffs' deadline to submit a summary brief on the types of damages that could be recovered under Massachusetts Wage Act.

Their brief argued two things: 1) that the Massachusetts Wage Act is broad enough to allow the recovery of the contract type damages that they sought; and 2) that the federal district court should certify the question of whether or not those types of damages could be recovered to the Massachusetts Supreme Judicial Court.

Coverall has not filed its opposition brief, but Rubenstein thinks it is safe to assume they will argue, as Judge Young ruled earlier back in May, that those types of damages are not recoverable and that after that briefing the court will do one of two things. “It will either deny certification based upon the types of damages the court determines are recoverable under the Wage Act; or it will further delay the certification question and certify the question to the Massachusetts Supreme Judicial Court,” Rubenstein said.

So what should franchisors take from this? “Despite what was clearly a franchisor win at trial, this case is not over,” Rubenstein concluded. 

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• Coverall Ruling Sends Shiver through Franchising
• Federal Judge: Franchising Sounds Like Ponzi Scheme
• Massachusetts Franchisee Sues Cleaning Firm