Executive Summary:
In an unpublished decision, Judge Fischer of the United States District Court for the Central District of California found in favor of 7-Eleven and against franchisees on the issue of whether 7-Eleven franchisees are employees. While the judge acknowledged the rationale of the District Court of Massachusetts in Patel v. 7-Eleven, Inc., he ultimately found that 7-Eleven does not satisfy the Borello test because 7-Eleven does not exercise sufficient control over its franchisees.
Citation:
Haitayan v. 7-Eleven, Inc. 2021 WL 4078727 (C.D. Cal. Sep. 8, 2021).
Relevant Background:
7-Eleven is the world’s largest franchisor of retail convenience stores with more than 8,000 units in the United States and more than 1,700 in California. Plaintiffs are four 7-Eleven franchisees (“Franchisees”). The facts related to Franchisor’s franchise system and Franchisees operations are numerous and are described more fully in the Decision to avoid repetition. Relevant here, Franchisees sued Franchisor alleging that they were employees and not independent contractors. This matter was tried on March 23 and March 24, 2021.
Decision:
As the reader may recall, this is the second time in as many years that 7-Eleven has been confronted with allegations by its franchisees that they should be considered employees and not independent contractors. In Patel v. 7-Eleven, Inc., 485 F.Supp. 3d 299 (D. Mass. 2020), the District Court of Massachusetts found the following:
“It cannot be the case … 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.”
While the District Court here acknowledged the above ruling, it choose not to rely on it. Instead, the District Court chose to perform an extremely thorough evaluation of the Franchisees’ claims pursuant to the Borello test with the principal questions being “whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” S.G. Borello & Sons, Inc. v. Dep’t of Indus. Rels., 48 Cal.3d 341, 350 (1989). The Court found that the significant control that Franchisees exercised over their businesses establishes that they are independent contractors. The relevant facts underlying that finding were as follows:
- “Plaintiffs admitted on cross-examination that they have complete control over when they work, how much they work, and when they take vacation.”
- “Plaintiffs also employed multiple individuals to work in their stores and exercised total control over the hiring, firing, wages, discipline, schedule and staffing of their employees.”
- Franchisor did not control “‘every exquisite detail’” of the uniforms of 7-Eleven employees or even if the Franchisees wore uniforms.
- Franchisees maintained a large amount of control over the operation of their stores deciding, with few exceptions, what products to carry and how to price and promote the products they chose.
- Franchisor’s monitoring and supervision of Franchisees work through field consultants was not the pervasive level of supervision present in other persuasive cases, field consultants did not have control over day-to-day operations, and no consequences occurred when Franchisees did not abide by a field consultant’s recommendation.
- Franchisee’s training was not a regular part of their jobs.
- The limited grounds under which the Franchisor could terminate a Franchisee pursuant to the Franchise Agreement were not so broad as to render the Franchisees dischargeable without cause.
Further flushing out the independent contractor question, the Court analyzed the secondary Borello factors. The Court’s findings on those factors was as follows:
- On the question of whether the Franchisees are engaged in a “distinct trade or calling” and “they do not hold themselves out in business,” the Court cited California statute in ruling that “the relationship created between a franchisor and a franchisee [is] a ‘business relationship,’ not an employment relationship.” Cal. Corp. Code §§ 31001, 31005(a)(2). This is further evidenced by the fact that Franchisees had the right to sell their franchise to others, some Franchisees owned competitive businesses, Franchisees held themselves out as business owners, and Franchisees identified themselves as self-employed in their tax returns. Beaumont-Jacques v. Farmers Grp., Inc., 217 Cal.App. 4th 1138, 1144-45 (2013) (A plaintiff who exercises discretion by “deducting … costs as a business expense in her personal tax returns and identifying herself as self-employed in those returns” is more likely to be an independent contractor.) As such, this factor weighs in favor of independent contractor status.
- On the question of whether the Franchisees required any special skill to operate the franchise, the Plaintiffs testified that an individual must be very skilled to handle the operation of a store and that a franchisee’s success is directly tied to his business savvy in operating his store or stores. As such, this factor weighs in favor of independent contractor status.
- On the question of whether the Franchisees supply their own tools and instrumentalities of his trade, the Court found that the Franchisor typically leases or acquires the land, leases or builds the store, attaches the utilities, and installs computer systems for a franchisee. As such, this factor weighs in favor of an employment relationship finding.
- On the question of the length of time performing services, lengthy tenures often indicates an employment relationship. However, the Court found this factor is neutral because “it would not make economic sense for a franchisee to invest in a franchise with a term too short for the franchisee to recoup his or her investment.”
- On the question of method of payment, Franchisees income was entirely dependent on the profits they generated operating their franchises and were not given any kind of hourly payment by Franchisor. As such, this factor weighs in favor of independent contractor status.
- On the question of whether Franchisees’ work is essential to Franchisor’s core business, the Court found that franchising–not operating convenience stores–is Franchisor’s core business. Here, the Court relied on the rationale of Curry v. Equilon Enterprises, LLC, 23 Cal.App. 5th 289, 307 (2018) where the Court found that “Shell was not in the business of operating fueling stations – it was in the business of owning real estate and fuel.” Notably, the Court explicitly stated that franchise cleaning industry operations as discussed in Vasquez v. Jan-Pro Franchising Int’l, Inc. are significantly different and limit the applicability of that case to the facts here. As such, this factor weighs in favor of independent contractor status.
Looking Forward:
Giving credit where credit is due, this was an excellent job by James Speyer of Arnold and Porter as well as Nancy Nguyen Sims and Norman Leon of DLA Piper and a well-written opinion by Judge Fischer. The lessons from this opinion are numerous and should be discussed with your franchise counsel but a few of the most important are as follows:
- While this is a fantastic result for the Franchisor, a single sentence in the opinion leaves as an open question just how many of these findings would need to be in favor of the putative employee to change the result: “Although the right to control is the ‘most important’ consideration, the Borello test considers a number of secondary factors to account for the ‘infinite variety’ of relationships.” The pithy Rumsfeld-ian lesson of this matter: there are aspects franchisors know they can control like brand standards; there are aspects that franchisors know they can’t control like franchisee’s wages, hours, hiring, firing, and terms and conditions of employment; and then there are an infinite number of aspects that franchisors may control that individually may not establish an employment relationship but together may amount to too much control. Each of those gray area aspects should be a part of a larger cost benefit analysis performed with the franchisor’s attorney.
- The critical question according to the Borello test is supposed to be “not how much control a hirer exercises, but how much control the hirer retains the right to exercise.” Ayala v. Antelope Valley Newspapers, Inc., 59 Cal.4th 522, 533 (2014). While this quote has been relied upon to attempt to create employment – even joint-employment – relationships, the Court’s analysis of the way in which the franchisees felt that the franchisor may or did use the franchise agreement, operations manual, and even field representatives to control their operations remains critical. Said differently, while this standard creates slightly more ambiguity than a direct and immediate control standard, a franchisor’s best defense to both the Borello test or any of the other various independent contractor or joint-employer tests remains to clearly demarcate under what circumstances it will “control” the franchise and/or franchisee.
- Last, the caveat of this opinion regarding the cleaning industry remains concerning. The ABC Test, Borrello test, or any number of other tests should be done on a case by case or at least a franchisor by franchisor basis and not a franchise sector by franchise sector basis.
This article was originally published on the California Franchise Network.
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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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