Employment Law Daily 7-Eleven franchisees plausibly alleged they were misclassified as independent contractors
Wednesday, July 25, 2018

7-Eleven franchisees plausibly alleged they were misclassified as independent contractors

By Ronald Miller, J.D.

Individuals who acquired 7-Eleven franchises in Massachusetts survived a motion to dismiss their claim that the franchisor misclassified its franchisee convenience store workers as independent contractors instead of employees in violation of the Massachusetts Wage Act, ruled a federal district court in Massachusetts. Here, the court found that allegations that a combination of long hours and unjustified deductions from pay resulted in a wage below that allowed by Massachusetts law were not so threadbare or speculative that they failed to state a plausible claim upon which relief can be based (Patel v. 7-Eleven, Inc., July 20, 2018, Gorton, N.).

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 determined store hours, controlled the payroll system and required that franchisees make daily monetary deposits into accounts that it controlled.

Classification as independent contractors. According to the plaintiffs, they were misclassified as independent contractors instead of employees, and therefore were deprived of benefits to which they were entitled under Massachusetts law, including minimum wage and protection from improper wage deductions. After the plaintiffs filed suit in state court, 7-Eleven promptly removed the action to federal court. Thereafter, 7-Eleven filed a motion to dismiss. The plaintiffs filed a motion to remand the case back to state court.

Franchise renewal contracts. On June 15, 2018, 7-Eleven distributed 2019 franchise renewal contracts to all Massachusetts franchisees, including franchisees who did not have agreements expiring in 2019. The contract contains a “release of claims and termination” section that requires renewing franchisees to release their claims in this case. In response, the plaintiffs filed an emergency motion seeking to enjoin 7-Eleven from soliciting those releases.

Remand. As an initial matter, the court considered the plaintiffs’ motion for remand. The plaintiffs asserted that removal was improper because the individual defendants defeated diversity jurisdiction and the “local controversy” exception to the Class Action Fairness Act (CAFA), 28 U.S.C. § 1332(d)(4), applied such that no federal question jurisdiction existed. However, 7-Eleven countered that the individual defendants were “nothing more than middle managers” who were fraudulently joined to destroy diversity jurisdiction, and that the conduct of the individual defendants was too insignificant to evoke CAFA’s local controversy exception.

Here, the court concluded that complaint against the individual defendants contained insufficient factual allegations to state a claim for relief. Only officers and agents “having the management of the corporation” may be held individually liable under the Massachusetts Independent Contractor Law or Wage Act. The complaint alleged only that the individual defendants “exercised extensive control over the plaintiffs’ work.” Because there was no “reasonable probability” that the Massachusetts Supreme Court would find that the plaintiffs’ complaint stated a cause of action against the individual defendants, the court found that they were fraudulently joined. Accordingly, the motion to dismiss claims against them was allowed.

Employees versus independent contractors. 7-Eleven next contended that the plaintiffs’ complaint alleging violation of the Massachusetts Minimum Wage Law should be dismissed because it did not allege sufficient factual matter. Specifically, 7-Eleven argued that the complaint did not adequately allege that any plaintiff ever received less than the minimum wage. The court disagreed. It concluded that the plaintiffs provided a multitude of allegations that plausibly supported their contention that they were employees, not independent contractors.

The complaint alleged that franchisees generally worked more than 50 hours per week while receiving take-home pay of less than the minimum wage. It further alleged that 7-Eleven deducted certain fees and payments from the plaintiffs’ wages. Accordingly, the combination of long hours and unjustified deductions from pay resulted in a wage below that of allowed by Massachusetts law. Those allegations were not so “threadbare or speculative that they fail to cross the line between the conclusory and the factual” and they sufficed to state a plausible claim upon which relief can be based.

Releases. The plaintiffs also sought an emergency motion to enjoin 7-Eleven from obtaining releases from putative class members. According to the plaintiffs, the releases were void under Massachusetts law and that 7-Eleven was attempting to interfere with the administration of this putative class action in violation of FRCP 23. Beginning in 2019, most franchisees would pay a higher percentage of the store’s gross profit to 7-Eleven than the franchisee is currently paying. 7-Eleven informed franchisees that it would offer existing franchisees the option to maintain their current charge for an additional term. According to the plaintiffs, this proposal was intended to coerce class members into waiving their rights under the Massachusetts Wage Act in exchange for the promise that 7-Eleven will not penalize them in the future.

After a comparison of the potential abuse by 7-Eleven with the rights of both parties, the court concluded that the plaintiffs’ emergency request for injunctive relief was premature and unwarranted. The Massachusetts Supreme Court subjects contracts that release or waive wage claims to heightened scrutiny. If the plaintiffs ultimately prove that: (1) they are employees who were paid less than the required wage; and (2) 7-Elevent’s contractual arrangement with class members provides a means for it to escape its duty to pay lawful wages, the purported release would be void under Massachusetts law.

Moreover, the court pointed out that while claims under the Wage Act “may be released retroactively as part of a settlement agreement,” but a general release is ineffective to waive an employer’s Wage Act claims unless it is voluntary, knowing, and supported by consideration. Moreover, under Crocker v. Townsend Oil Co., absent express language that Wage Act claims are being released, a general release is ineffective to waive them. As a consequence, the franchisees did not release their Wage Act claims when they signed their original franchise agreements.

Renewal contracts. In contrast to the existing franchise agreements, the “release of claims and termination” provision of the franchise renewal contracts includes express language about the Wage Act and this case. However, the plaintiffs contended that the release still did not operate as a settlement of wage claims because it was not supported by consideration. A general release that operates as a settlement “must be supported by consideration.” In this instance, the court noted that 7-Eleven was not obligated to renew franchise agreements with any franchisee and was not threatening to terminate existing agreements. Thus, renewal of such an agreement constituted consideration.

Notwithstanding its conclusion, the court observed that the release raised serious concerns. The court construes the extremely broad language of the contract as applying to future wage claims, not just past claims. To allow such an end run around the Wage Act would contravene the express purpose of the statute and would nullify the provisions that specifically forbids this type of arrangement by a special contract with an employee or by any other means.

That said, the court pointed out that “neither the enforceability of the releases in the existing franchise agreements nor of the franchise renewal agreements is before the Court at this time. Those questions will ripen only if and when it is determined that: 1) these plaintiffs are employees, 2) a class of which they are members is certified and 3) 7-Eleven violated the Wage Act to the plaintiffs’ detriment.”

The plaintiffs’ emergency motion was denied.

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