Franchisees: Independent Contractors or Employees?

By Bud Culp

A series of court rulings in Massachusetts have challenged the assumption that franchisees are independent contractors and not employees.  In the most recent case, the Massachusetts Supreme Judicial Court held that a franchisee for a commercial cleaning service, misclassified by the franchisor as an independent contractor instead of an employee, was entitled to recover damages for franchise fees and insurance premiums deducted from his “wages.”  Awuah v. Coverall North America, Inc., 460 Mass. 484 (August 31, 2011).  

Coverall franchisees enter into a franchise agreement to provide commercial janitorial services to third-party customers.  Coverall contracts directly with the customers to provide cleaning services, bills the customers, and pays the franchisee for services after deducting franchise royalties and insurance payments.  The court found that this procedure improperly deferred payment of wages and that the Coverall system, in effect, required employees to “buy their jobs” in violation of public policy.  Id at 497-98.

While the contract structure of Coverall differs from that used in most franchise relationships, franchisors should analyze their business model to determine whether its franchisees may be considered independent contractors in the states in which they do business.  Franchisors should consider changing a model in which the franchisor, and not the franchisee, bills the customer and collects payment.  Franchisors should also consider granting franchise rights from a different company than the legal entity that operates any company-owned units.  Otherwise, franchisors may inadvertently find their franchisees have been transformed into employees and themselves liable under labor, tax and other laws for workers’ compensation and damages.