Antitrust Law Daily FTC franchise-specific regulatory scheme governed over general independent contractor test in Massachusetts
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Friday, September 11, 2020

FTC franchise-specific regulatory scheme governed over general independent contractor test in Massachusetts

By Ronald Miller, J.D.

To find that the franchisees were employees under the FTC definition would "eviscerate the franchise business model."

In view of the conflict between the Massachusetts Independent Contractor Law and the regulatory scheme promulgated under the Federal Trade Commission (FTC), the franchise-specific regulatory regime of the FTC governed over the general independent contractor test in Massachusetts, ruled a federal district court in Massachusetts. Because the FTC Franchise Rule requires a franchisor to exercise "significant" control or else risk not being in compliance, the rule established a regulated classification status unique from that of an employee or independent contractor. Thus, the Massachusetts ICL did not apply to 7-Eleven. Accordingly, the court granted summary judgment in favor of 7-Eleven in a class action lawsuit by franchisees claiming they were misclassified as independent contractors, instead of employees (Patel v. 7-Eleven, Inc., September 10, 2020, Groton, N.).

Misclassification claim. A group of 7-Eleven franchisees brought a class action alleging that the franchisor (1) misclassified its franchisees as independent contractors instead of employees in violation of the Massachusetts Independent Contractor Law (ICL), (2) violated the Massachusetts Wage Act, and (3) violated the Massachusetts Minimum Wage Law. 7-Eleven filed a counterclaim asserting various contractual claims.

Control by 7-Eleven. The named plaintiffs are residents of Massachusetts who acquired 7-Eleven franchises and worked as store manager and convenience store clerks. They brought class action claims on behalf of individuals who acquired 7-Eleven franchises and performed services as store managers and convenience store clerks. According to the plaintiffs, 7-Eleven dictated how franchisees do their jobs, including requirements with respect to uniforms, specific training and monitoring the workplace remotely through the use of in-store cameras. 7-Eleven also provided the store layout, recommended inventory, determined store hours, controlled the payroll system and required that franchisees make daily monetary deposits into accounts that it controlled.

The plaintiffs alleged that because they were misclassified as independent contractors instead of employees, they were deprived of benefits to which they were entitled under Massachusetts law, including minimum wage and protection from improper wage deductions. 7-Eleven does not pay franchisees a salary. Instead, franchisees may withdraw weekly or monthly "draws" from the store’s gross profit.

Previously, the court ruled that the franchisees had plausibly alleged that they were misclassified as independent contractors. Currently pending before the court were the parties’ cross motions for summary judgment and the franchisees’ motion for class certification.

ABC test. In Massachusetts, "an individual performing any service" for another is presumed to be an employee. The purported employer may rebut that presumption by establishing the three conjunctive elements of an independent contractor relationship: (1) 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; (2) the service is performed outside the usual course of the business of the employer; and, (3) 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. Failure to satisfy any prong of the ABC Test results in classification of the individual as an employee.

The threshold inquiry under the Massachusetts ICL is whether an individual provides "any services" to the purported employer. 7-Eleven argued that it provided services to its franchisees, not the other way around. For their part, the franchisees responded that they provided services that were integral to 7-Eleven’s business model.

Franchise model. 7-Eleven contended that it subscribes to the "business-format franchise" model whereby it, the franchisor, provides services to the franchisee. It emphasized the language of the Franchise Agreement which requires each franchisee to pay the 7-Eleven Charge in exchange for a license to use 7-Eleven’s marks, operating system, property and other "continuing services." On the other hand, the franchisees pointed to their "obligation" to operate 7-Eleven convenience stores, work full time in those stores, prepare and submit cash reports, deposit receipts, pay taxes, and maintain a reasonable and representative quantity of recommended inventory.

Given the nature of 7-Eleven’s business-format franchise, the competing allegations, the various contractual obligations of both parties and the language of the Franchise Agreement, the court found that genuine issues of material fact remain such that it was inappropriate to enter summary judgment on the threshold services question at this juncture. Therefore, the court proceeded to 7-Eleven’s alternative argument as to why the Massachusetts ICL did not apply on these facts.

Here, 7-Eleven argued that because federal regulation made it impossible to satisfy the first prong of the ABC test, the test did not apply. Prong 1 required 7-Eleven to demonstrate that the franchisees were "free from control and direction in connection with the performance of the service." The inquiry is primarily concerned with the actual relationship of the parties.

Federal regulation. The franchisees offered a litany of examples of the control 7-Eleven exercised over them both in reality and as provided for in the Franchise Agreement. While 7-Eleven conceded that it does exercise some level of control over its franchisees, it argued that it is bound to do so by federal regulation. Specifically, it noted that the Federal Trade Commission has promulgated a series of regulations to prevent deceptive and unfair practices in the sale of franchises and business opportunities and to correct consumers’ misimpressions about franchise and business opportunity offerings.

The FTC Franchise Rule acknowledges that 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. This language is in direct conflict with Prong 1 of the Massachusetts ICA. Because the FTC Franchise Rule requires a franchisor to exercise "significant" control or else risk not being in compliance, the rule established a regulated classification status unique from that of an employee or independent contractor.

Accordingly, 7-Eleven was granted its motion for summary judgment.

The case is No. 17-11414-NMG.

Attorneys: Adelaide H. Pagano (Lichten & Liss-Riordan) for Dhananjay Patel. Matthew J. Iverson (DLA Piper US) for 7-Eleven, Inc.

Companies: 7-Eleven, Inc.

MainStory: TopStory FranchisingDistribution MassachusettsNews

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