Boston, Mass. (September 23, 2020) - In August 2017, five individual convenience store franchisees filed suit in federal court for violations of the Massachusetts Independent Contractor Law (Massachusetts ICL), the Massachusetts Wage Act, and the Massachusetts Minimum Wage Law against their franchisor, 7-Eleven, Inc. The franchisees alleged that they, and all other franchisees in the Commonwealth of Massachusetts, were employees of 7-Eleven under state law.
On September 11, 2020, after years of discovery, United States District Judge Nathaniel M. Gorton rejected the franchisees' arguments and dismissed their claims in Patel, et al v. 7-Eleven, Inc., et al, No. 17-cv-11414 (NMG) (JCB) (D. Mass), noting the "inherent conflict" between the franchise business model, federal law, and the Massachusetts ICL's ABC test.
The Massachusetts Independent Contractor Law
Under Massachusetts law, "an individual performing any service" for another is presumed to be an employee. In order to rebut the labor-friendly definition of employee, purported employers in the State of Massachusetts are required to meet the requirements of the ABC test, widely used across numerous other states.
Specifically, they are required to demonstrate (A) the individual is, in contract and in fact, free from control and direction in performance of the service; (B) the service is performed outside the usual course of business of the employer; and (C) the individual is customarily engaged in an independently established business of the same nature as that involved in the service performed.
The Federal Trade Commission's Franchise Rule
The Federal Trade Commission (FTC) has promulgated a series of regulations collectively called the "FTC Franchise Rule," 16 C.F.R. §§ 436.1, et seq., in order to prevent unfair practices in the sale of franchises and related business opportunities. Notably, the FTC Franchise Rule defines a franchise as:
[A]ny 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:
(1) 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;
(2) 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
(3) As a condition of obtaining 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.
The Parties' Arguments
As a fundamental part of its defense, 7-Eleven argued that the Massachusetts ICL did not apply because (1) 7-Eleven provides services to its franchisees, not the other way around, and (2) federal regulations made it impossible for 7-Eleven to comply with the Massachusetts ICL.
In response, the franchisees argued (1) the Massachusetts ICL applied because they did provide services integral to 7-Eleven's business model, (2) the FTC Franchise Rule did not preempt the Massachusetts ICL, and (3) 7-Eleven could not make the required showing under the ABC test.
As a preliminary matter, the court declined to determine as a matter of law whether the franchisees provided "services" as construed under the Massachusetts ICL despite the liberal construction of the term.
Notwithstanding its refusal to rule on the services issue, the court ultimately sided with 7-Eleven, granting its motion for summary judgment and denying the franchisees' motions for summary judgment and class certification. The decision was based on the conflict between the Massachusetts ICL and the FTC Franchise Rule.
Citing state court precedent, the court found that where there is a conflict between the Massachusetts ICL and any regulatory scheme (i.e. the FTC Franchise Rule), "the specific trumps the general." And in order to comply with the FTC Franchise Rule, which obligates franchisors to exercise "significant" control over their franchisees, compliance with the Massachusetts ICL's ABC test was not possible lest the company violate federal law.
In closing, the court encapsulated its decision by noting that a finding in favor of the franchisees "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."
The federal court's decision is a welcome one for franchisors who have been facing increasingly hostile courts and legislatures. The increased scrutiny has subjected franchisors to significant financial exposure for joint employer liability and/or wage and hour liability claims, and threats of unionization and increased labor costs, all concerns that the franchise business model was designed to avoid.
In light of this decision, when faced with misclassification suits, franchisors should endeavor to show the court that, as a matter of federal law and practice, the franchise model itself requires them to exercise a certain level of control over their franchisees. So long as the level of control exercised is geared towards protecting the franchise's trademarks, system, and goodwill, rather than controlling the wages and day-to-day operations of the local franchise business, franchisors may be able to use their control as a sword in misclassification litigation.
As the number of states applying some version of the ABC test continues to grow, the argument successfully advanced by 7-Eleven in Massachusetts should prove useful to franchisors throughout the country.
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