A court case in Massachusetts is the talk of the franchise industry and providing quite a few franchisors with concern about future legal changes in the industry.
The case, known as Awuah v. Coverall North America, is a complicated one, but its central issue is this: are franchisees employees of franchisors or independent contractors with a special business arrangement with a franchisor? Perhaps the difference may seem pedantic on first glance, but in legal practice, this distinction completely alters the franchisor-franchisee relationship. As the Wall Street Journal reported, considering franchisees as empolyees would mean “franchisers would have to pay prevailing wages, match Social Security and Medicare contributions, extend workers' compensation, and provide other benefits.”
Judge William G. Young judged that Coverall franchisees should be viewed as employees. As a result, Coverall VP Jacqueline Vlaming told Franchise Times: “In Massachusetts, we’ll have to pay them a bi-weekly wage. Either we’ll have to get our franchise owners to send us time sheets or we’ll have to find a way for them to check in and out with their customers.”
This is clearly ruffling a lot of feathers among franchisors and there is a fear that Judge Young’s decision could effect similar judgments across the country. The case featured in two seminars at the IFA Legal Symposium that was held in Washington from Sunday until yesterday. The question everyone is asking themselves is: ‘is this a one-off judgment or could it have a domino effect?’
Franchise Times have reported that the IFA is now lobbying to have franchising considered as a unique business model in Massachusetts:
“On April 8, the IFA sent a letter to Massachusetts Senator Thomas McGee, chairman of the legislature’s joint committee on Labor and Workforce Development, saying that Judge Young’s decision in favor of the Coverall franchisees was an ‘unintended consequence of the 2004 revisions to the independent contractor law. Becoming a franchisee is an explicit choice not to be someone’s employee.’”
I must say that the IFA’s stance sounds right: a franchisee is in business for themselves first. But should Judge Young’s interpretation of the franchisee-franchisor relationship be implemented nationally, the effect on franchising could be potentially dangerous.
Ending on a positive note, Eric Karp of Witmer Karp Warner & Ryan told Blue Mau Mau that it’s too early to press the panic button: "I don’t think that Judge Young’s ruling imperils franchising in general or franchising in Massachusetts. To suggest somehow that Judge Young was suggesting that all franchises are Ponzi schemes or that every franchise model in Massachusetts might run afoul of the independent contractor law is a vast overstatement,” he said.