Are Your Independent Contractors Actually Employees?
By: Susan E. Wells
A recent case in the Massachusetts Federal District Court,
Awuah, et al. v. Coverall North America, Inc., recently
held that certain franchisees of the Coverall commercial cleaning
franchise system were employees, not independent contractors.
The Massachusetts Wage Act requires
an employer to satisfy all of the following requirements in order
to be classified as an independent contractor, not as an
employee:
1. The worker must be free from
control and direction in connection with the performance of
services, both under his contract and in fact.
2. The services must be performed
outside the usual course of business of the employer.
3. The worker must customarily be
engaged in an independently established trade, occupation,
profession or business of the same nature as that involved in the
service performed.
In the Awuah case, the Court held that the workers were
employees because both Coverall and its franchisees sold cleaning
services and because the workers did not provide cleaning services
for others; therefore, the workers did not perform services outside
the usual course of business of the employer. Although Coverall
argued that it was not in the business of providing commercial
cleaning services, but was in the franchising business, the Court
was not persuaded. In fact, the Court likened franchising to Ponzi
schemes. The Court further held that because Coverall's franchisees
were employees, they were eligible for minimum wage, overtime pay
and workers' compensation protection.
Riding on the coattails of the Awuah case, franchisees in the
Jani-King and Jan-Pro commercial cleaning franchise systems have
filed lawsuits similar to Awuah. Independent contractors in other
fields, such as delivery vans and strip clubs, have also raised
similar claims.
Other consequences of the Awuah case include concern by other
franchisors and other business owners that their franchisees and
other independent contactors will likewise be classified as
employees and they will be subject to minimum wage, overtime pay,
workers' compensation protection and possibly requirements of other
employment laws and regulations. As a result, certain franchisors
and other business owners are electing to take Massachusetts out of
their expansion plans.
Although federal law differs from Massachusetts law on how the
term "independent contractor" is defined, the Internal Revenue
Service was already targeting companies that conduct business
similar to Coverall's structure. In the Coverall franchise model,
the franchisor advertised for, contracted with and billed most, if
not all, of the franchisees' customers. In addition, Coverall
provided its franchisees initial equipment, although franchisees
were required to provide any necessary replacements.
In addition, most state laws differ
from Massachusetts law as well. Therefore, although it is possible
that other state courts might follow Massachusetts' lead, it is
doubtful.
Susan E. Wells is a partner with the law firm of
Jaburg Wilk. She has been assisting start-up and seasoned
clients with their business transactions, including franchising,
for 30 years.
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