Bundy Law Firm PLLC June 27, 2012

Two new court decisions, in March and in June of this year, out of Massachusetts raise the issue of what is the line between a franchisee and an employee.  Acknowledging that Massachusetts has some unique laws regarding classification of employees and that at least one state (Georgia) has given franchisors an exemption, the decisions in those cases are worth some thought by every franchisor–and franchisee.

In the first case, the court held that Coverall of North America, Inc. misclassified its workers as franchisees when, in fact, they were employees–depriving them of important rights.  The court awarded the “employees” treble damages totaling more than three million dollars.

In the second case, Jani-King will be required to pay damages in an amount not yet determined to approximately 300 janitorial workers.

These cases both involve the janitorial industry.  However, the issues could arise in other industries or segments.  This is particularly true because franchisors continue to push the envelope in terms of maximizing their control over every minute detail of franchisees’ operations.  It is significant that these companies operated corporate outlets in the same industry as their workers.  The franchisors booked and scheduled the workers with accounts, supervised their operations on a periodic basis, billed the customers, collected receipts, deducted moneys owed to the franchisor and gave the balance to the franchisees. 

In both cases, finding that the workers were employees under the law, the courts found that they were entitled to a full refund of all initial franchise fees and royalties paid. 

Wise franchisors and their franchise attorneys will give serious thought to whether the relationship they are constructing has so many indicia of control that it shifts from being a franchise to being an employee relationship.  Future new court decisions may further flesh out where that line is located.  Unless a franchisor relishes being a test case, it would be a good idea to evaluate whether each control is necessary and appropriate for their unique franchise system.