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Don Sniegowski's picture

Franchisees as employees

The big issue coming out of the Coverall case is that franchisors are reminded that too much control over the day-to-day sales and operations of franchisees, as if they were company-owned, may define the franchisees as employees and enact employment laws.

Franchisors plug into POS systems, monitor orders, connect with customers, attempt to control business entrepreneurs  -- is that actually an employee relationship?

3 prong test under Mass law

It is true that franchisors exercise a large amount of control over their franchisees. In some cases, a franchisor may exercise even more control--for example, a franchisee is often required to show the franchisor his personal tax return including sensitive information about the franchisee and spouse.

In this case, the judge ruled against Coverall because it found a violation of the 2nd prong of the statute. Specifically the judge found that Coverall was not in the "business" of franchising but rather in the business of providing cleaning services. Therefore as a matter of law in Massachusetts, the "franchisees" were actually employees. This is why some observers have noted the implications for the post-term non-compete clause.

The Mass law MGL 149 reads:

Section 148B. (a) For the purpose of this chapter and chapter 151, an individual performing any service, except as authorized under this chapter, shall be considered to be an employee under those chapters unless:—

(1) 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

(2) the service is performed outside the usual course of the business of the employer; and,

(3) 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.

Ray Borradale's picture

Employees to the contract?

The customer base belongs to the franchisor and with non-compete clauses that goes beyond even the contract term. Franchisees do not control the supply chain and many would argue effectively that they don’t benefit from the franchisor’s supply chain.  Franchisees get to hire and fire in a role somewhat similar to that of a manager. 

Many would argue that there are systems where the profit performance is mostly, if not totally controlled by the franchisor. Many more would argue that the difference is that employees get paid and some might mention employees get paid without having to risk everything.

Under Australia’s work place legislation employers are held accountable for the termination of a staff while franchisors are not held accountable when terminating franchisees who [mostly] cannot fund a defence.

In Australia we have seen many cases being pushed toward the Industrial Relations Courts with confidence held by some astute lawyers that franchisees were employees to the contract.  But they seem to either settle or the franchisor’s lawyers delay for a few years until franchisees run out of money.  This is quite probably because the franchising industry suspects a ruling somewhat similar to Judge Young’s.

Such a ruling here would bring into play legislation that would very much flatten the playing field.

What Judge Young says

Here is the essence of Judge Young's pronouncements in other languages for the benefit of our immigrant friends. It is translated from Babylon online translation service:

SPANISH: U. S. Juez William Young dice LAS servicio de limpieza Coverall suena como una pirámide de engañar inmigrantes a comprar una franquicia. Gobernó la tienda propietarios son en realidad los empleados de la Coverall LAS y tienen derecho a salario mínimo y beneficios.

RUSSIAN: американский судья Уильям молодых говорит Coverall уборке помещени компании звучит, как финансовой пирамиды хитрость иммигрантов на покупку франшизы. Он постановил, что владельцы магазинов, фактически работников Coverall компании и имеют право на минимальную заработную плату и пособия.

URDU: امریکی جج کا کہنا ہے کہ Coverall ولیم نوجوان صفائی سروس کمپنی اوازیں جیسے پايئرامڈ بتولا تارکین وطن کو خریدنے کے لئے ادھکار. انہوں نے لاہور کے مالکان کی دکان کے ملازمین ہیں ان پر واقعی طور پر Coverall کمپنی اور مستحق ہوں. کم سے کم تنخواہ اور مراعات

KOREAN: 미국의 젊은 판사는 윌리엄 Coverall 소리 환경미화원 회사 피라미드처럼 체계를 장난을 사는 이주민들에게 8372만원. 판결했습니다. 그리고 상점 주인들은 실제로는 직원들이 회사 Coverall 자격이 있고 최소 연봉과 이익을 가져다 줄 것입니다.

CHINESE: 美國法官William Young說Coverall清潔服務公司好像一個金字塔計劃,故弄玄虛移民,買一個專營權公司。 他裁定有關商戶其實是雇員的Coverall公司,有權得到最低工資和福利。

Not possible to be a bad franchisor and a member of the IFA

Is the federal court picking on Coverall Cleaning, a paying member of the International Franchise Association? Other franchisors would not let their names be tarnished by allowing such riff-raff to receive the blessings and honor of their fellowship.

Think about it. How could what a judge deems as a Ponzi franchise system possibly win the 2008 Stevie American Business Award for Best Support Organization? Business brokers Franchoice has selected Coverall Cleaning to sell.

Nah. Those organizations just wouldn't let convicted tricksters taint their good name.