New Jersey commercial cleaning company sold ‘franchises’ to low-wage custodial workers to avoid paying minimum wage, overtime

CLARK, N.J. – People who work as commercial building cleaners often toil late into the night after others have finished their day’s work. They vacuum carpets, sweep, mop and wax floors, clean restrooms, and perform tasks many people fail to notice. Their jobs help others enjoy comfortable and clean environments. They are often among the lowest-paid workers in America.

Now imagine an employer who convinces these vulnerable workers they are not low-wage employees, but instead, could live the American dream by purchasing their own cleaning businesses. That dream looked more like a nightmare for workers in New Jersey who put in long hours, sometimes earning less than the minimum wage, worked more than 40 hours a week with no overtime, and incurred substantial debt for the purchase of a so-called franchise, yet had little to no control over any aspect of the businesses they supposedly owned. 

Investigators from the U.S. Department of Labor’s Wage and Hour Division found that Grammatico Enterprises, Inc., doing business as Heits Building Service of Central and Northern New Jersey, and its owner, Giuseppe Grammatico, created a bogus franchise structure in order to misclassify employees as independent contractors, while retaining control over virtually all aspects of their employment.  By doing so, the employer attempted to deprive workers of  minimum wage and overtime required by the federal Fair Labor Standards Act.  The firm also violated the law’s record-keeping provisions.

“Franchising can be a legitimate and profitable business model that can also be fully compliant with the law. But we will vigorously challenge using the model as a cover for misclassification that undercuts compliant businesses and directly harms workers,” said Dr. David Weil, administrator of the Wage and Hour Division.  

In September 2015, the department sued Grammatico and its owner seeking back wages, damages and other recourse. The department filed a consent judgement in the U.S. District Court for the District of New Jersey, in which it agrees to pay $25,000 in back wages and an additional, equal amount in liquidated damages to the workers. The judgment also orders Heits to forgive $154,441 in financing fees it claims the employees owe, removing what was a huge financial burden from these workers.

“By holding out the promise of a owning a business, Grammatico misclassified these employees as independent contractors to avoid its responsibility to pay the wages required by law,” said John Warner, director of the Wage and Hour Division’s Northern New Jersey District Office. “The company profited at the expense of hard-working, low-wage workers. Grammatico led these workers to believe they were independent business owners, charging them thousands of dollars in franchise fees in addition to cheating them out of wages.  This judgment sends a clear message to the industry – the Wage and Hour Division will not tolerate such blatant exploitation, and will use every tool available to us to ensure workers are paid every penny they are owed.”  

These “franchises” were not allowed to acquire new customers, have their own customers, negotiate service prices, or even purchase supplies from a vendor of their choice – they simply paid a fee to work for the employer.  All business transactions with clients were handled by Grammatico.

“In reality these ‘franchises’ were underpaid workers burdened with debt, and fees,” said Jeffrey Rogoff, Regional Solicitor of Labor in New York, whose office litigated the case.  “This sort of arrangement is all too common in this industry, and illustrates the vulnerabilities workers face in the fissured workplace.   The Labor Department will continue to pursue all business models that attempt to avoid an employer’s responsibilities to its workers, and all available legal measures to ensure that workers are properly classified and paid for their work.”

In addition to paying the back wages and liquidated damages, and forgiving the financing fees, the company and Grammatico also agree to:

• Stop selling new Heits franchises in New Jersey.
• Stop requiring their employees to purchase uniforms, supplies or insurance.
• Stop deducting  royalty or management fees from employees’ wages.
• Ensure that Grammatico will only classify workers as independent contractors when the workers meet the standard provided by the division’s administrator’s interpretation. 

Under the FLSA, employers must distinguish employees from bona fide independent contractors.  An employee – as distinguished from a person who is engaged in a business of his or her own – is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business that he or she serves. For more information, visit http://www.dol.gov/whd/regs/compliance/whdfs13.htm.  

The misclassification of employees as independent contractors presents a serious problem for affected employees, employers and the entire economy. Misclassified employees often are denied access to critical benefits and protections – such as family and medical leave, overtime, minimum wage and Unemployment Insurance – to which they are entitled. Employee misclassification generates substantial losses to the U.S. Treasury and the Social Security and Medicare funds, as well as to state Unemployment Insurance and workers’ compensation funds. Misclassification also creates a competitive disadvantage for employers who comply with the law.

The FLSA requires that all covered, nonexempt employees be paid at least the federal minimum wage of $7.25 per hour for all hours worked, plus time and one-half their regular hourly rates for hours worked beyond 40 per week.  The FLSA provides that employers who violate the law are, as a general rule, liable to employees for their back wages and an equal amount in liquidated damages. Liquidated damages are paid directly to the affected employees. Additionally, the law requires employers to maintain accurate time and payroll records and prohibits retaliation against employees who exercise their rights under the law.