Employment Law Daily Franchisee was not employee of 7-Eleven under FLSA or New Jersey Law Against Discrimination
Tuesday, June 7, 2016

Franchisee was not employee of 7-Eleven under FLSA or New Jersey Law Against Discrimination

By Greg Hammond, J.D. The franchisee of six 7-Eleven stores could not be considered a 7-Eleven “employee,” ruled a federal district court in New Jersey, noting in particular that 7-Eleven did not control the manner in which the franchisee performed his work. Thus, 7-Eleven was entitled to summary judgment on the terminated franchisee’s counterclaims brought under the Fair Labor Standards Act and the New Jersey Law Against Discrimination (7-Eleven, Inc. v. Sodhi, May 31, 2016, Shipp, M.). Alleged breach of franchise agreements. 7-Eleven filed suit against the franchisee of six 7-Eleven stores, claiming that the franchisee committed incurable breaches of the franchise agreements by intentionally failing to report multiple hundreds of thousands of dollars of merchandise sales, masking a portion of inventory shortages, making purchases of inventory that were not reported to 7-Eleven, using cash illicitly and secretly, siphoning from the stores to pay workers in cash, paying workers for overtime work at rates less than the minimum wage, and paying different rates to workers based on whether workers were documented or undocumented. Counterclaims. The franchisee filed four counterclaims, alleging violations of the New Jersey Franchise Practices Act (NJFPA), breach of the implied covenant of good faith and fair dealing, violation of the FLSA, and violation of the NJLAD. 7-Eleven moved for summary judgment on the four counterclaims. Not “employee” under FLSA. The franchisee failed to show he was an "employee" in support of his FLSA claim. In particular, the court found that: (1) 7-Eleven did not control the manner in which the franchisee performed his 7-Eleven business because he dropped in when it was convenient, wore a 7-Eleven uniform only once or twice, visited India regularly for up to three weeks at a time, regularly traveled around the country on unrelated business, was totally hands-off in his management of the store, had other business ventures unrelated to 7-Eleven that took his time, and had the ability to set the prices charged for merchandise sold in the stores; (2) it was undisputed that the franchisee shared in the gross profits of the store; (3) the franchisee alleged that he spent millions of dollars on franchise fees, licenses, approvals, and related goods and services in operating his stores; (4) the franchisee demonstrated entrepreneurial skills in the operation of the six stores; and (5) the franchisee could terminate the franchise agreements at any time and 7-Eleven could terminate the agreements for good cause. These factors all weighed against a finding that the franchisee was a 7-Eleven employee. Summary judgment was therefore granted in favor of 7-Eleven on the FLSA claim. NJLAD counterclaim failed too. Because the owner was not an employee, the court found that the NJLAD claim for discrimination in the employment context failed. In addition, the NJLAD does not cover discrimination during the ongoing execution of a contract, according to the court, which undermined the owner’s claim that 7-Eleven discriminated against him—an independent contractor—in the ongoing execution of his franchise agreements. 7-Eleven was therefore entitled to summary judgment on this claim. New Jersey Franchise Practices Act. The franchisee also claimed that 7-Eleven violated the NJFPA by imposing unreasonable standards on his stores and attempting to terminate the franchise agreements without good cause. Both arguments were rejected, however, because there was no evidence of 7-Eleven’s supposed "unreasonable standards." In addition, the franchisee admitted that he failed to pay payroll taxes, provide workers’ compensation insurance, or withhold and pay Social Security taxes for employees of his stores, which constituted a material breach of the franchise agreements. 7-Eleven was consequently entitled to summary judgment because no reasonable juror could find that 7-Eleven did not have good cause to terminate the franchise agreements. Lastly, 7-Eleven did not breach the implied duty of good faith and fair dealing, the court determined, because even if 7-Eleven had an ulterior motive in terminating the franchise agreements, such an ulterior motive did not preclude termination for good cause.

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