Mass. High Court Rules for Cleaning Services Franchisees

In Awuah et als v. Coverall North America, Inc, the Massachusetts Supreme Judicial Court (SJC) unanimously ruled that the cleaning service franchisor violated the Massachusetts Wage Act by the way it paid and charged its employees (franchisees).The Court responded to certified questions on damages allegedly suffered by the franchisee-employees posed by a US District judge. Judge William Young had ruled that Coverall misclassified as independent contractors those plaintiffs who were Massachusetts residents.

The certified questions related to damage calculations under Massachusetts law, primarily the Massachusetts Wage Act, G. L. c. 149 sections 148 and 150. The Court ruled that the franchisor's accounts receivable financing system used to pay the employees improperly deferred payment of the employee's earned wages and that an employer (here, also franchisor) may not deduct certain insurance costs (e.g., workers' compensation charges that normally are the employer's responsibility) from an employee's earned wages.

The Court did not address the judge's ruling that the franchise owners were employees (and improperly misclassified as independent contractors). It was presumed. Coverall conceded that the plaintiffs were employees for purposes of the case. The Court said that its answers to the judge's certified questions were premised on the plaintiffs' agreed-on employee status. It referred to them as such throughout the opinion. Notably for franchising generally, however, citing Boulanger v. Dunkin' Dounts, Inc., 442 Mass. 635 (2004), the Court stated: "Our answers to the certified questions ... have no application to properly classified independent contractors operating under franchise agreements.".

Construing the Wage Act, which requires "prompt and full payment of wages due", the Court answered the judge's questions as follows:

1. Under MA law, may a franchisor lawfully use customer accounts receivable financing to pay a franchisee who is characterized as an employee under G.L. c. 149 sec. 148B? NO.

Rationale: The Wage Act demands that wages earned be paid within a set time following each pay period. The employee having provided his labor, service or performance, earned his wage according to the Court. The franchisor's argument that no pay is due until all "contingencies", including customer payment, were satisfied, was rejected. The accounts receivable financing system followed by the franchisor (which allowed it to recoup advances to the employee if a customer did not pay) violated the "special contracts" provisions of the Wage Act. Under sec. 148, no person may by special contract with an employee or by any other means exempt himself from sec. 148 or sec. 150. Also, the method of recoupment ("chargeback") was an improper deduction under the Wage Act.

2. Under MA law, do the 'damages incurred' for which a misclassified worker can seek recompense under G. L. 149 sec. 150 include costs that employers statutorily must bear? YES.

Rationale: To permit an employer to transfer to its employees the cost of workers compensation insurance premiums would be inconsistent with both the general intent and specific language of the Workers Compensation Act (WCA).
This act, represents an exercise of the state's police power to impose on designated classes of employers of labor, the burden of compensation for injuries to employees arising out of the course of their employment. The employer can reimburse himself for this expense as part of the cost of its product or service. Thus, it concluded that the employee could recover as damages incurred, any such insurance premiums that he was obliged to pay Coverall under his contract. The franchisor argued that while it may be required to provide workers compensation insurance for its workers, nothing in the WCA prevents an employer and employee from agreeing that the employee is to be responsible for the premiums. The Court ruled there was no merit to this claim.

3. Under MA law, may an employer lawfully withhold wages to an employee if the employer and employee agree that such wages are not earned until a customer remits payment? NO.

Rationale: See discussion for question 1 above.

4. Under MA law, may an employee and his employer lawfully agree that the employee will pay some or all of the cost of workers' compensation or other insurance coverage procured to alleviate the liability of the employer? NO.

Rationale: See discussion of question 2 above.

Franchise Fee Discussion.

Finally, the Court took the opportunity to respond to Judge Young's statement that he welcomed other advice about Massachusetts law relevant to the case. It addressed the initial and additional (royalty) franchise fees that the plaintiff paid (or agreed to pay) in order to enter into the franchise relationship (which the judge determined to be a direct employment relationship). It said: "Our view is that fees such as these constitute "special contracts," not ususal between employers and employees.

In substance, they operate to require employees to buy their jobs from employers and in that respect, we think they violate public policy.
[citation omitted]."

The SJC went on to quote from a dissenting opinion by Justice Brandeis in Adams v. Tanner, 244 U.S. 590, 604 (1917) as follows:

"paying for the privilege of going to work, and paying more the more urgently the job is needed, not only keeps people unnecessarily unemployed, but seems foreign to the spirit of American freedom and opportunity."

Once again, however, in a footnote, the SJC appears to exclude standard franchise arrangements from the sweep of its ruling. It said:

"We emphasize that our concerns over "franchise fees" relate to the potentially exploitative nature of payments by an employee to an employer for the purpose of securing employment. We expressly do not conclude that franchise fees violate public policy when they are agreed to by parties who are not in an employer-employee relationship."

Holding that a contract term that violates public policy is not entitled to be enforced, the Court ruled that in the context of the Wage Act, the "franchise fees" paid by the plaintiff did not represent a "clear and established debt", and to the extent that such fees are paid back to Coverall out of wages earned from Coverall, they represent a prohibited assignment of an employee's future wages to his employer under G. L. c. 149 sec. 150.

The citation is 2011 Mass. LEXIS 734, decided August 31, 2011.

This is a significant development in the law for the franchise community.

Clearly, cleaning service franchisors with the Coverall-type contract structure should take serious note of this decision and govern themselves accordingly. Conversely, franchise systems that use more traditional contractual approaches (where franchisee and franchisor are not in the same business dealing directly with the same customers a la Coverall) are not likely to be at risk that their franchisees may be misclassified as independent contractors in Massachusetts.