The new legislation in Maryland will become effective October 1, 2010.

  Franchisees Found to be Employees as Opposed to Independent Contractors in Massachusetts
In a closely-watched case in Massachusetts, the District Court in that state recently issued a preliminary ruling that franchisees were considered employees of the franchisor, as opposed to independent contractors. Franchisors should closely review their franchise disclosure documents, franchise agreements, and marketing materials in light of this recent decision.

In Awuah v. Coverall North America, Inc., Coverall franchisees brought a claim alleging that Coverall, the franchisor, misclassified its franchisees as independent contractors and committed unfair or deceptive trade practices. Most states adopt a three-part test in order to determine whether an individual providing services is an employee or an independent contractor, and putative employers need only show that one prong of the test is satisfied to classify an individual as an independent contractor. However, under Massachusetts law, individuals performing services are classified as employees if the putative employer cannot meet all of the following tests:  

(1) the individual is free from control and direction in connection with the performance of the service (in contract and in fact);

(2) the service is performed outside the usual course of the business of the employer; and

(3) the individual is engaged in an independently established trade or business of the same nature involving the service performed.

The court made its decision solely on the second prong of the analysis, finding that Coverall did not prove that it is in a different business than that of its franchisees. Coverall argued that its business is different than that of its franchisees as it is in the business of franchising, while the franchisees are in the cleaning business. However, the court found that because Coverall spent time, skill, effort and money training franchisees, providing them with uniforms and identification badges, contracting and billing with customers, and receiving royalties on the services that the franchisees provide, Coverall sells cleaning services, the same services provided by its franchisees. 

As a result, the plaintiff franchisees were found to be employees in Massachusetts. The implications of this decision mean that the franchisor may be liable for unpaid wages and benefits, including health insurance, worker’s compensation, overtime pay, insurance, FMLA, and many other rights afforded to employees that are not similarly provided to independent contractors. 

In light of this decision, the International Franchise Association has begun lobbying the Massachusetts Legislature to amend the law to recognize franchising as a distinct business model. However, franchisors should carefully examine their franchise agreements, disclosure documents, and marketing materials, and consider ways in which to separate the franchisor’s business from that of the franchised business, including the manner in which the franchisor provides support to its franchisees.

Health Care Reform: New Calorie Labeling Laws Will Apply to Franchises
A major issue facing franchisors and franchisees alike has been the differing state requirements with regard to nutritional labeling of food products. These laws present a significant challenge to franchisors that operate on a national basis and are required to comply with regulations that are inconsistent with regard to the content, scope and application of the food labeling requirements. Many franchisors and franchisees have called for national legislation to set one standard that restaurants and food establishments can rely upon when creating their menus. The health care reform bill adopted in March contains such federal health and nutrition labeling mandates, applicable to certain “chain” restaurants and food establishments. Continue

Announcements:

Rep. John Kline Visits Anytime Fitness’ Corporate Headquarters
Andrew Perrin of Larkin Hoffman and Meredith Nethercutt of the International Franchise Association coordinated a visit by John Kline to Anytime Fitness’s headquarters in Hastings Minnesota on April 5, 2010. The congressman has represented Minnesota’s second congressional district since 2002, and has been a strong advocate of small business.  Anytime Fitness and its franchisees operate the largest network of 24 hour co-ed fitness facilities, with over 1,300 units opened throughout the world. Approximately 40 people attended the event, including representatives from Express Personal Services.  The congressman discussed the health care reform package that was signed into law that week by President Obama, as well as Anytime Fitness’s proposals to encourage fitness incentive programs and its “Exercise IS Medicine” initiatives. Perrin is a member of the International Franchise Association’s Franchise Congress, a program instituted last year by the IFA to increase the IFA’s advocacy efforts of small business issues in Congress, and to inform elected officials of the importance of franchising in the nation’s economy. Andrew Perrin previously served as a member of the IFA’s Board of Directors.

Fittante Presents on the "Accidental Franchise"
Joe Fittante presented on "The Accidental Franchise" as part of the Minnesota Continuing Legal Education Franchise Law Series. This seminar featured a discussion on elements that constitute a franchise, how to structure a relationship to avoid application of the franchise laws, and arguments that are often made by counsel in an attempt to characterize a relationship as a franchise. It also examined the regulatory scheme governing franchising, and ramifications that arise from accidental franchise relationships.

Upcoming Events:

The IFA Legal Symposium will be held on May 16-18 in Washington, D.C. For more information, visit the IFA website.  At the Symposium, Larkin Hoffman's Jim Susag will be speaking on "The Importance of Enforcing Post-Termination Rights in a Down Economy." Pam Merkle and Cyndi Klaus will be leading roundtable discussions on "Subfranchisor Disclosure Requirements" and "The Upsides and Downsides of Litigation," respectively.

Larkin Hoffman will be hosting the next Twin Cities Women's Franchise Network event on May 12 from 5:30 to 7:30 p.m. (CST).  This event will feature motivational speaker Deirdre Van Nest, as well as networking with women in the Twin Cities franchise community. Click here for further details.

Joe Fittante will co-present a live webcast as a part of the Minnesota CLE Franchise Law Series on Friday, May 14, 12:00 to 1:00 (CST). His session is entitled "Look Before You Leap - Navigating the Franchise Disclosure and Registration Maze." It will examine required pre-sale disclosure on a federal and state level, and state registration laws applicable to franchisors. Click here for further details and to register.

Recently Published:

Non-Compete Cases: Does Anyone Really Win?
Chuck Modell and Jim Susag recently published an article in the May issue of LJN’s Franchising Business & Law Alert entitled, “Non-Compete Cases: Does Anyone Really Win?” This article examines the textbook law of non-compete cases, and then goes further to explore what happens in the real world when a non-compete claim is brought in court.

This article is especially important because it highlights the practical advice that we give our clients with regard to non-compete agreements and claims, based on real world experience. 

To read the article, click here.

Developments in Antitrust Law
In the March 2010 issue of the LJN's – Franchising Business & Law Alert, Cyndi Klaus and Meredith Bauer discuss developments in antitrust law relative to franchise and distribution agreements.  One recent case examines unlawful price discrimination under the Robinson-Patman Act, which prohibits manufacturers from discriminating in price among similarly situated purchasers, so as to lessen competition or create a monopoly.

The second recent case discusses illegal tying arrangements under the Sherman Act. Claims such as these have arisen in the franchise context in relation to required purchasing arrangements. 

To read the article, click here.

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Our Practice
For more information about Larkin Hoffman’s Franchise and Distribution practice group, visit our homepage by clicking here.

Contact our Larkin Hoffman Franchise and Distribution group members: 

Charles S. Modell
Email 952-896-3341

Joseph J. Fittante, Jr.
Email 952-896-3256

William G. Thornton
Email 952-896-1578

James M. Susag
Email 952-896-1572

Cynthia M. Klaus
Email 952-896-3392

Pamela N. Merkle
Email 952-896-3337

Meredith A. Bauer
Email 952-896-3263

Jon S. Swierzewski
Email 952-896-3280

Andrew F. Perrin
Email 952-896-3394

Edward J. Driscoll 
Email 952-896-3235