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In a stark illustration of how courts and administrative agencies look to the realities of a relationship instead of the title given to it to determine whether an individual is an "employee" or "independent contractor," the Massachusetts Supreme Court recently found in Coverall North America, Inc. v. Commissioner of the Division of Unemployment Assistance that a franchisor was liable for contributions to the state's unemployment fund for the reported earnings of a franchisee who claimed that she was an "employee" of the franchisor. While the court's determination turned upon the particular nature of the relationship at issue in the case, it does serve as an important reminder that an "independent contractor" or "franchisee" label does not insulate an employer from liability under statutes designed to protect or benefit "employees."
As set forth in the decision, the franchisor, Coverall North America ("Coverall"), specializes in selling commercial janitorial cleaning businesses, and provides its new franchisees training in cleaning techniques and management techniques, as well as an initial customer base. If the franchisee establishes a new customer through its own direct solicitation, the new customer is required to sign a contract with Coverall. Coverall also bills all customers directly, and deducts finance charges, royalties and management fees from subsequent payments to the franchisee.
The claimant began working at a nursing home under the direction of a Coverall franchise. After the franchise lost the nursing home account, the claimant purchased her own Coverall franchise and became a franchise owner so that she could continue her position at the nursing home. Coverall then gave this new franchisee the nursing home account and "assigned" her to work at the nursing home Monday through Friday, five hours per day, for an indefinite period, in exchange for a payment of $1,485.00 monthly for services rendered. Coverall negotiated the contract for services directly with the nursing home, billed it directly, and handled all complaints about the franchisee's services, without any involvement of the franchisee. Although the franchisee received her daily tasks from the nursing home itself, she was also supervised by a Coverall field consultant.
When the franchisee complained to the Coverall field consultant that the assigned tasks for the nursing home could not be completed during a 25-hour workweek, the consultant directed her to complete the tasks nevertheless, causing the claimant to have to work additional hours and weekends, without additional compensation. She eventually refused to do any additional work, filed a claim for unemployment benefits, and claimed that she was an employee discharged by Coverall.
Although the agency responsible for unemployment claims initially rejected the claimant's claims on the grounds that she was working as an independent contractor, not an employee, the hearing examiner reversed and found that Coverall was obligated to pay contributions to the state fund based on the claimant's earnings. The appeals board affirmed, and upon Coverall's request for judicial review, a Massachusetts District Court also affirmed.
On appeal, the Massachusetts Supreme Court — the state's highest court — also affirmed, finding that Coverall could not establish the three factors set forth in the state's unemployment compensation statute for an individual to be deemed an "independent contractor" unentitled to benefits. Specifically, the court found that Coverall failed to meet its burden of showing that the services at issue were performed "as part of an independently established trade, occupation, profession, or business of the worker," as required under the statute. The court also noted that even though the franchisee was entitled to expand her business, any new customers would have been clients of Coverall, not her own. As such, the court found that the services constituted "employment" for Coverall rather than services by an independent contractor, and thus Coverall was liable for contributions for the franchisee's reported earnings.
This decision was clearly dependent on the unique nature of the franchise relationship between Coverall and the individual claimant. Still, employers must be aware that a label — or even an agreement — does not control whether an individual is an employee or independent contractor. Rather, an agency or court will conduct a fact-specific analysis to determine whether an individual is entitled to rights or benefits afforded employees under state and federal statutes. Employers should periodically review all of their independent contractors to confirm that they are properly classified. Please contact any member of Schiff Hardin's Labor and Employment group for additional information about this case or for information regarding classification of independent contractors.
Catherine Hobart Thompson, "Immigration Law for the Construction Industry," Lorman Education Services, Charlotte, N.C. (March 6, 2007) [Link]; Atlanta Electrical Contractors Association, Atlanta, Ga. (May 3, 2007)
Henry W. Sledz Jr., "2006-07 Developments in Labor and Employment Law," Food & Dairy Human Resources Conference, La Quinta, Calif. (March 6, 2007)
Ralph A. Morris, "How Far Can (Or Should) You Go? Pushing the Ethical Envelope," American Bar Association Section of Labor and Employment Law Midwinter Meeting, New Orleans, La. (March 31, 2007) [Link]
Avoiding a Holly, Jolly Lawsuit
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