Is Snap-On Tools the next Coverall?

On February 8th, 2012, Forbes named Snap-On Tools its choice of Top 20 Franchise systems that "any competent operator should consider."

Within days, Forbes was forced to reconsider its methodology - effectively conceding that Snap-On Tools item 20 disclosure was misleading because Snap-On Tools doesn't ever terminate a franchise, but simply "reacquires" the operators route.

Unfortunately, even after receiving a barrage of well thought out criticisms and evidence, Forbes was still unable to identify the most important issue surrounding Snap-On Tools.

Mr. Sean Kelly had posted on his site, Unhappyfranchisee.com, a negative opinion for the franchise eligibily from the SBA.  The SBA attorney after reviewing the Snap-On Tools franchise contract concluded:

"the franchisee does not have the right to profit commensurate with ownership".

This is legal conclusion is a very bad thing for Snap-On Tools.  A regulator has determined that the hallmark of ownership is not present for those people who signed an agreement with Snap-On Tools.  

All franchisors have to exert some control through their franchise agreements in order to protect the value of their trademarks - indeed the franchisee is simply leasing the right to use these trademarks in their local business.   But as an independent operator, the franchisee has to have some room to make his or her own business decisions - the right to profit commensurate with ownership, not of the trademarks but of the franchise opportunity.

The last major franchise system that exercised too much control was Coverall.  They were successfully sued for misclassifying employees as franchisees - precisely because the level of control Coverall  exerted over the people who had signed franchise agreements was commensurate with these people being employees.

Recall that in the Coverall case, Coverall controlled all the billing.  A customer paid Coverall the franchisor for the work done by the franchisee and then Coverall remitted what it thought it owed the franchisee.  I discussed why this mechanism might have been needed, yet was an overreach by the franchisor.  The end result deprive the franchise of a right to profit commensurate with ownership.

Mr. Kelly argues that Snap-On Tools is actually more controlling than Coverall:

 "Coverall follows a business model specific to most other janitorial franchises, a model in which "franchisees" don't have to necessarily generate their own leads, close their own sales, etc. The franchisor fulfills the vital functions of marketing, sales, billing, collection and the franchisee, in theory, just has to show up.

Snap-on Tools, like the other three tool truck franchises, is in many ways, more controlling even then Coverall and its ilk. When a franchisee signs on he is issued a "List of Calls" (aka LOC) which represents 200 potential customers. Each of these 200 represents a tool-using mechanic or technician; the mechanics in a single dealership may represent 5-10 of the 200, a one-man shop would represent 1.

Franchisees are not technically allowed to sell to or solicit to anyone not on their list of calls. So if a mechanic from a neighboring dealership walks up to the truck with money in hand, the Z technically can't sell to him, nor can they add his dealership to his route even if no one is servicing it. He can petition Snap-on for permission, but it's up to their SO's discretion."

Some legal commentators had argued that Coverall decision was a result of a peculiar test for employee/independent operator in Massachusetts law.  Whether this is true or not,  Snap-On Tools control over the operator was found by the SBA to deny the operator the right to profit commensurate with ownership.  This test is the more general and widely accepted test for independent contractor status - the right to profit.  

So, if people who signed the franchise agreements with Snap-On Tools are more like employees than franchisees because they don't have a contractual right to profit, can a missclassification lawsuit be far behind - especially since Forbes so helpfully highlighted the issue in the national press?  Pretty sure that this was not Snap-On Tools intent when Forbes named it #1.

(Some franchisees in the Snap-On Tools system have indicated that they are forming an Independent Franchisee Association, Mobile Dealers Association.  No doubt some of the experienced franchisee group and class action litigators will be knocking on their website door shortly.)