Q&A: Shannon Liss-Riordan Discusses Awuah and Other Issues

Liss-Riordan: The decision is significant for the franchising industry because it demonstrates that the mere use of the “franchise” label does not protect a company from being subject to employment and wage-and-hour laws if its franchisees meet the state law test for being employees rather than independent contractors. In this case, we have alleged that, rather than providing a true entrepreneurial opportunity for its franchisees, Coverall essentially sold them low-paying jobs. The court has ruled the franchisees were employees under Massachusetts law, and we have argued that as employees, they are entitled to guaranteed minimum wage, overtime, and other protections afforded employees.

FBLA: Does the lawsuit also affect employees of a franchisee? In other words, one person became a franchisee, but he or she hired a couple of friends, too. Are they being treated separately from the franchisee?

Liss-Riordan: The case has not yet directly addressed the other workers who assist the franchisees with their cleaning work. Right now, the case is focused on several lead plaintiffs who signed franchise agreements and performed cleaning work themselves for Coverall.

FBLA: The Coverall ruling was for partial summary judgment on behalf of workers. What happens next?

Liss-Riordan: We will have a trial to determine what damages the Massachusetts franchisees are entitled to receive because of their misclassification. The trial will also address whether Coverall misclassified franchisees in other states and whether Coverall engaged in unfair and deceptive practices and was unjustly enriched through its treatment of its franchisees. We have brought this case as a national class action, and the court has decided that the trial will be a test case trial focusing on the claims of four franchisees located in Massachusetts, Florida, and New Jersey, before the judge addresses the question of national class certification.

FBLA: Coverall is only one type of employment-and-wage issue that could affect franchisors and franchisees today. What other trouble spots do you see arising?

Liss-Riordan: There are many areas of wage-and-hour law that are getting attention in the courts. Another large area is the misclassification of workers as exempt from overtime pay.

FBLA: Do you think that the recession of the last two years has created more pressure on employers, so they are taking positions that are causing greater conflict with workers? In other words, will we be seeing an increase in the number of employment and wage disputes?

Liss-Riordan: There has been an increase in wage-and-hour disputes over the last few years. I'm sure the recession plays a part in that, as employers have pushed the envelope further in their treatment of employees so as to save money. Out-of-work employees are also more likely to bring wage-and-hour lawsuits than current employees.

FBLA: When thinking about how employees are treated, it's more complicated in franchising than in a stand-alone business. In many situations, franchisors have successfully argued that they are not employers of the workers in individual franchise units; the franchisees are the employers. Do you see a distinction between the franchisor and the franchisee as the employer, or do you think that they are equally responsible for treating employees in accordance with the law?

Liss-Riordan: Whether a franchisor will be held liable for the treatment of employees depends a lot on the applicable state or federal law. In general, the more control that the franchisor has over the employees' work conditions, the more likely it is to be held liable. However, a franchisor that creates a system that encourages or makes possible the employees of its franchisees not to be paid properly is asking for trouble.

FBLA: Let's assume, for the sake of argument, that a franchisor does not have direct, day-to-day control over hiring and management of workers in a particular franchise unit (a fast food restaurant or a tax-preparation service). How would you recommend that this franchisor strive to ensure that franchisees follow employment laws so that everyone stays out of court?

Liss-Riordan: The franchisor could ensure that its franchisees know and understand employment laws and make possible a system in which they can and will comply with them.

Shannon Liss-Riordan, partner at Lichten & Liss-Riordan, P.C. (Boston) is a nationally known employment-law attorney and has been named to the Chambers “Best Lawyers in America” in 2008, 2009, and 2010. Her practice concentrates on class action litigation involving failure to pay wages, overtime, gratuities, minimum wage, and misclassification of employees as independent contractors. She represented the plaintiffs in Awuah, et al. v. Coverall North America, Inc., in which U.S. District Court Judge William G. Young compared Coverall's franchising model to a Ponzi scheme.

While the judge's Ponzi comparison in Awuah attracted attention in the franchise industry, the greater impact of his ruling might be found elsewhere. In this Q&A, Liss-Riordan discusses Awuah, as well as the general significance of litigation about the classification of franchisees and wage-and-classification issues for employees of franchisees.

FBLA: In March, a judge in the U.S. District Court in Massachusetts ruled that Coverall of North America, a large cleaning franchisor, had misclassified franchisees as contractors. You brought the litigation on behalf of (a number) of these franchisees. What's the significance of this decision for franchisors and franchisees?

Liss-Riordan: The decision is significant for the franchising industry because it demonstrates that the mere use of the “franchise” label does not protect a company from being subject to employment and wage-and-hour laws if its franchisees meet the state law test for being employees rather than independent contractors. In this case, we have alleged that, rather than providing a true entrepreneurial opportunity for its franchisees, Coverall essentially sold them low-paying jobs. The court has ruled the franchisees were employees under Massachusetts law, and we have argued that as employees, they are entitled to guaranteed minimum wage, overtime, and other protections afforded employees.

FBLA: Does the lawsuit also affect employees of a franchisee? In other words, one person became a franchisee, but he or she hired a couple of friends, too. Are they being treated separately from the franchisee?

Liss-Riordan: The case has not yet directly addressed the other workers who assist the franchisees with their cleaning work. Right now, the case is focused on several lead plaintiffs who signed franchise agreements and performed cleaning work themselves for Coverall.

FBLA: The Coverall ruling was for partial summary judgment on behalf of workers. What happens next?

Liss-Riordan: We will have a trial to determine what damages the Massachusetts franchisees are entitled to receive because of their misclassification. The trial will also address whether Coverall misclassified franchisees in other states and whether Coverall engaged in unfair and deceptive practices and was unjustly enriched through its treatment of its franchisees. We have brought this case as a national class action, and the court has decided that the trial will be a test case trial focusing on the claims of four franchisees located in Massachusetts, Florida, and New Jersey, before the judge addresses the question of national class certification.

FBLA: Coverall is only one type of employment-and-wage issue that could affect franchisors and franchisees today. What other trouble spots do you see arising?

Liss-Riordan: There are many areas of wage-and-hour law that are getting attention in the courts. Another large area is the misclassification of workers as exempt from overtime pay.

FBLA: Do you think that the recession of the last two years has created more pressure on employers, so they are taking positions that are causing greater conflict with workers? In other words, will we be seeing an increase in the number of employment and wage disputes?

Liss-Riordan: There has been an increase in wage-and-hour disputes over the last few years. I'm sure the recession plays a part in that, as employers have pushed the envelope further in their treatment of employees so as to save money. Out-of-work employees are also more likely to bring wage-and-hour lawsuits than current employees.

FBLA: When thinking about how employees are treated, it's more complicated in franchising than in a stand-alone business. In many situations, franchisors have successfully argued that they are not employers of the workers in individual franchise units; the franchisees are the employers. Do you see a distinction between the franchisor and the franchisee as the employer, or do you think that they are equally responsible for treating employees in accordance with the law?

Liss-Riordan: Whether a franchisor will be held liable for the treatment of employees depends a lot on the applicable state or federal law. In general, the more control that the franchisor has over the employees' work conditions, the more likely it is to be held liable. However, a franchisor that creates a system that encourages or makes possible the employees of its franchisees not to be paid properly is asking for trouble.

FBLA: Let's assume, for the sake of argument, that a franchisor does not have direct, day-to-day control over hiring and management of workers in a particular franchise unit (a fast food restaurant or a tax-preparation service). How would you recommend that this franchisor strive to ensure that franchisees follow employment laws so that everyone stays out of court?

Liss-Riordan: The franchisor could ensure that its franchisees know and understand employment laws and make possible a system in which they can and will comply with them.