Court Case Could Cost Franchises Millions

An upcoming Massachusetts court case will decide whether franchisees are considered independent contractors or employees.

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A court case scheduled for May 17 could change the employment status of franchisees nationwide -- and end up costing their franchisers millions

The case will decide whether franchisees of Coverall North America, a Florida-based commercial-cleaning business, can receive minimum wage, overtime pay, and other employment benefits, or will be instead judged as ineligible independent contractors. While the structure of the Coverall franchise is unique, if allegations of its misclassification of employees are upheld, branches in other states could also face changes, and other franchises could find themselves under scrutiny.

The International Franchise Association, a Washington, D.C.-based trade group, maintains that franchisees are independent contractors, and has been pushing, along with other business groups, to get Massachusetts lawmakers to take franchising out of the state's employment law. In light of the pending case against Coverall and potential legal changes, attorneys nationwide are also advising franchisers against growing their companies into Massachusetts until a final decision is made.

The case has been debated by legal experts since March, when U.S. District Judge William G. Young of Boston ruled that Coverall's franchisees are employees paying for the right to operate its core cleaning business. He stated that Coverall violated Massachusetts employment law by failing to offer important benefits, and by carrying out billing and collection for services provided by franchisees prior to paying them. If the ruling stands after Monday, many franchises will have to classify independent franchisees as employees rather than contractors, which could mean a sizable tab -- franchisers would be responsible for paying the prevailing wages of franchisees, matching their Social Security and Medicare contributions, and increasing workers' compensation and offering various other benefits.

Franchises are not often involved in employee misclassification cases, but as government budgets dwindle, these types of cases have been catching the attention of lawmakers. Both the federal government and state governments may receive millions of dollars in extra revenue if they can prove that employers have misrepresented their workers.

Tags: Coverall North America, employees, franchisees, franchisers, franchises, independent contractors, lawsuit, Massachusetts

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