Executive Summary:
In a published decision, Judge Gorton of United States District Court for the District of Massachusetts issued a decision finding that 7-Eleven franchisees claims that they were employees of 7-Eleven corporate pursuant to Massachusetts ABC Test was preempted by the Federal Trade Commission’s Franchise Rule and, therefore, the ABC Test was inapplicable to the franchise industry.
Citation:
Patel v. 7-Eleven, Inc., 485 F.Supp.3d 299 (D. Mass. 2020).
Relevant Background:
For more than 50 years, 7-Eleven (“Franchisor”) has sold convenience store franchises. In addition, Franchisor operates corporate stores, which are managed by Franchisor employees. As of 2018, there were approximately 1,700 company stores and 7,200 franchises in the United States with 160 of those franchises located in Massachusetts. In relevant part, Franchisor’s franchise agreements generally provides standard language including that the Franchisee will hold itself out to the public and exercise complete control over the day-to-day operations of the store as well as all employees but that the Franchisee must operate the franchise in accordance with brand standards.
Plaintiffs comprise a putative class of 7-Eleven franchisees with their stores located in Massachusetts (“Franchisees”). Franchisees asserted multiple employment claims for relief against Franchisor stemming from an allegation that Franchisor misclassifies its franchisees as independent contractors instead of employees in violation of the Massachusetts Independent Contractor Law. Franchisor filed a counterclaim against Franchisees. The matter pending before the Court are cross-motions for summary judgment.
Decision:
While the analysis is lengthy, the relevant issue of this decision for the California franchise industry relates to the Court’s analysis of the Franchisees’ assertion that they are employees and not independent contractors under Massachusetts Independent Contractor Law. The relevant findings were as follows:
- In Massachusetts, an individual performing any service for another is presumed to be an employee.
- A purported employer can rebut that presumption by satisfying each of the prongs of Massachusetts’ “ABC Test.” Specifically, the purported employer must establish:
The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and
The service is performed outside the usual course of the business of the employer; and
The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
- Franchisor contends that the ABC Test is inapplicable because (1) Franchisor provides services to Franchisees and not the other way around and (2) the Massachusetts ICL is preempted by federal regulations. Franchisee contends that (1) Franchisees provide services that are integral to Franchisor, (2) the ABC Test is not preempted by federal regulations, and (3) Franchisor failed to rebut the presumption that Franchisees are employees.
- The Court found that there were genuine issues of material fact that could not be resolved regarding whether the franchisor or franchisee provides services to the other.
- The Federal Trade Commission (“FTC”) possesses the authority to promulgate regulations prohibiting unfair or deceptive trade practices and, pursuant to that authority, it promulgated a series of regulations collectively called the “FTC Franchise Rule.” See 16 C.F.R. § 436.1 et seq.
- The FTC Franchise Rule defines a franchise as:
Any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:
- The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;
- The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and
- As a condition of obtained or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate. See 16 C.F.R. § 436.1(h)
- In Monell v. Boston Pads, LLC, 471 Mass. 566, the Court found that “where a relationship as defined by regulation expressly precludes the satisfaction of a prong of the independent contractor statute, the independent contractor statute will not govern.
- The italicized language is in direct conflict with Prong 1 of the Massachusetts ICL. Based thereon, the Court granted Franchisor’s motion for summary judgment and made the following compelling statement:
It cannot be the case, as plaintiffs suggest, that, in qualifying as a franchisee pursuant to the FTC’s definition, an individual necessarily becomes an employee. In effect, such a ruling by this Court would eviscerate the franchise business model, rendering those who are regulated by the FTC Franchise Rule criminally liable for failing to classify their franchisees as employees … Not only is such a conclusion unsupported by Massachusetts law but it also implicates a legislative decision beyond the purview of this Court.
Looking Forward:
First, it is worth thanking Matthew Iverson, Jamie Kurtz, Jennifer Brown, and Norman M. Leon of DLA Piper LLP for their excellent work and result in this matter.
With that in mind, there are numerous lessons to be learned from this matter for California franchisors and franchisees:
- While AB5 was going through the Assembly and the Senate, it was difficult to reconcile why the franchise industry would not be carved out given the ABC Test was inapplicable and would lead to absurd results. In a single paragraph, the Massachusetts District Court plainly stated why this is the case and provided a quote for Franchisors to rely on going forward if and when a franchisee tries to claim that they are employees and not independent contractors.
- While the argument regarding who serves who in the franchisor/franchisee relationship was an interesting exercise, the federal preemption argument is one that more readily ties the hands of state and district courts alike and provides a better path to motions for summary judgment and, now, potentially even motions to dismiss.
- Last, a word of caution. The decision in this case is logical and based on well-settled law but should not be taken as a long-lasting victory. It is likely that this is the first of many in this line of cases where judges may find differently. More importantly, this line of cases will include a similar employment issue with a different legal analysis: joint employer liability. Do not conflate the two analyses.
This article was originally published on the California Franchise Network.
As always, our team stands ready to assist your business with all of its franchising needs. If you have questions or need assistance, please contact the authors listed below.
Thomas O’Connell – Tom O’Connell is a Shareholder at Buchalter APC, where he serves as Chair of the firm’s Franchise Law Practice and Chair of Litigation for the firm’s San Diego office.
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