March 24, 2022
By: Thomas O’Connell
Citation:
Patel v. 7-Eleven, Inc., 489 Mass. 356, 183 N.E.3d 398 (2022)
Executive Summary:
In this reported decision, Justice Wendlandt of the Supreme Judicial Court of Massachusetts addressed whether the Massachusetts Independent Contractor Statute (Mass. Gen. Laws ch. 149, § 148B) applies to the franchise relationship between 7-Eleven, Inc. and its franchisees. The Court held that the three-prong test (“ABC test”) under the Independent Contractor Statute governs such relationships and does not conflict with the disclosure obligations imposed on franchisors by the Federal Trade Commission (FTC) Franchise Rule (16 C.F.R. § 436.1 et seq.). This decision clarified the interplay between state and federal law in the context of franchise operations, potentially expanding employment rights for franchisees classified as employees under Massachusetts law.
Relevant Background:
The plaintiffs, franchisees of 7-Eleven, Inc., filed a class action lawsuit alleging that they were misclassified as independent contractors rather than employees, violating the Massachusetts Independent Contractor Law (Mass. Gen. Laws ch. 149, § 148B), Massachusetts Wage Act (Mass. Gen. Laws ch. 149, § 148), and Minimum Wage Law (Mass. Gen. Laws ch. 151, § 1). Under their franchise agreements, the plaintiffs were obligated to operate their stores continuously, purchase inventory from preferred vendors, and adhere to other operational requirements. Compensation was derived from store profits after deducting fees owed to 7-Eleven, rather than receiving a fixed salary.
The defendants argued that the FTC Franchise Rule preempts the Independent Contractor Statute because the Rule requires certain disclosures when a franchisor exercises control over its franchisee’s operations.
Initially, the federal district court ruled in favor of 7-Eleven, reasoning that an inherent conflict exists between the statute and the Rule (Patel v. 7-Eleven, Inc., 485 F. Supp. 3d 299, 309 (D. Mass. 2020)). Thus, the plaintiffs appealed, and the U.S. Court of Appeals for the First Circuit certified the question of law to the Massachusetts Supreme Judicial Court.
Decision:
The Supreme Judicial Court of Massachusetts addressed the certified question regarding the interplay between the Massachusetts Independent Contractor Law (ICL) and the Federal Trade Commission (FTC) Franchise Rule, providing critical clarifications on their compatibility and the applicability of the ICL to franchise relationships.
- The court held that the ICL, codified at G.L. c. 149, § 148B, applies to franchisor-franchisee relationships when the franchisee performs any service for the franchisor. The ICL’s three-prong test presumes a worker is an employee unless the purported employer demonstrates that the individual is free from control and direction in performing the service (Prong 1); that the service is performed outside the usual course of the employer’s business (Prong 2); and that the individual is engaged in an independently established trade, occupation, or business (Prong 3).
This test, as established in Somers v. Converged Access, Inc., 454 Mass. 582, 911 N.E.2d 739 (2009), seeks to ensure proper classification of workers and prevent the misclassification of employees as independent contractors.
- The court rejected the federal district court’s finding that the FTC Franchise Rule conflicts with the ICL. The FTC Franchise Rule, codified at 16 C.F.R. §§ 436.1 et seq., governs pre-sale disclosures by franchisors to prospective franchisees to promote transparency in franchise agreements. The Rule allows franchisors to exert significant control over franchisees to ensure brand consistency but does not mandate specific levels of control. Thus, the court emphasized that compliance with the FTC Rule does not preclude franchisors from also adhering to the ICL; that the ICL focuses on employment classification, while the FTC Rule addresses disclosure obligations and that these laws serve distinct purposes and are not inherently incompatible.
Therefore, the court concluded that the determination of whether a franchisee is free from control under Prong 1 of the ICL requires an individualized assessment of the franchisor’s actions rather than a blanket assumption based on compliance with the FTC Rule.
- The court clarified that legitimate franchise relationships, where independent entities collaborate without evading employment obligations, are not prohibited by the ICL. However, the classification of franchisees as independent contractors must be substantiated under the three-prong test. The court cited Monell v. Boston Pads, LLC, 471 Mass. 566, 31 N.E.3d 60 (2015), as precedent for evaluating employment relationships based on statutory criteria rather than labels in agreements.
- Finally, the court reiterated that proper classification under the ICL entitles workers to protections under Massachusetts wage laws. These include the right to timely payment of wages under G.L. c. 149, § 148, the minimum wage under G.L. c. 151, § 1, and overtime pay under G.L. c. 151, § 1B.
The court remanded the case to the federal court for further proceedings consistent with its interpretation, requiring a detailed assessment of the relationship between 7-Eleven and its franchisees under the ICL’s framework.
Looking Forward:
This case highlights two significant lessons for franchisors:
- Franchisors must be cautious when structuring franchise agreements to avoid inadvertently meeting the criteria for employee classification under Massachusetts’s stringent Independent Contractor Statute. Operational control and mandatory guidelines that extend beyond franchise branding may expose franchisors to liability for misclassification.
- The decision underscores the importance of reconciling federal disclosure obligations under the FTC Franchise Rule with state employment protections. Franchisors operating in Massachusetts should reassess their agreements to ensure compliance with both sets of regulations.
For California franchisors, the following additional lessons apply:
- Operational Control and Franchise Agreements: Similar to Massachusetts, California’s ABC test, codified in Labor Code §2775(b), applies strict criteria for determining whether a worker is an independent contractor. Franchisors should limit control over franchisees’ daily operations to what is necessary for brand consistency to avoid misclassification.
By and large, the ruling is a reminder that courts prioritize worker protections under state laws, even in complex franchise arrangements. Both franchisors and franchisees in California should seek tailored legal advice to mitigate risks and ensure compliance with evolving legal standards.