Case Report – April 2022

Patel v. 7-Eleven, Inc..; DP Milk Street Inc., 489 Mass. 356, 2022 Mass. Lexis 146*; 2022 WL 869486, Decided March 24, 2022. 

In this opinion, the Massachusetts Supreme Judicial Court answered the following certified question from the U.S. Court of Appeals, First Circuit: 

“Whether the three-prong test for independent contractor status set forth in [the independent contractor statute] applies to the relationship between a franchisor and its franchisee, where the franchisor must also comply with the FTC Franchise Rule.” 

The Supreme Judicial Court held that where a franchisee is an “individual performing any service” for a franchisor, “the three-prong test set forth in the independent contractor statute applies to the relationship between a franchisor and the individual and is not in conflict with the franchisor’s disclosure obligations prescribed by the FTC Franchise Rule.” 

Procedural  Overview 

 Plaintiff Dhananjay Patel and four other individuals filed a complaint in Massachusetts state court against franchisor 7-Eleven, Inc., and others. Plaintiffs had all entered into franchise agreements with 7-Eleven and operate 7-Eleven branded convenience stores in Massachusetts. Plaintiffs alleged they and others similarly situated were 7-Eleven employees who had been misclassified as independent contractors. Defendants removed to federal court in the district of Massachusetts. On cross motions for summary judgment, the district court entered summary judgment in favor of 7-Eleven, ruling that “the independent contractor statue does not apply to franchisee-franchisor relationships because there is an “inherent conflict” between the independent contractor statute and the FTC Franchise Rule.” (Id. at 358 citing Patel v. 7-Eleven, Inc. 485 F. Supp. 3d 299, 309 (D. Mass. 2020).) Plaintiffs appealed to the First Circuit, who certified the question set forth above, explaining there appears to be a conflict between the independent 

Legal Analysis

Independent Contractor Statute. The Court noted that the independent contractor statute establishes a standard to determine whether an individual performing services for another is an employee or an independent contractor. (See G. L. c. 149 and G. L. c. 151.) An employee is generally entitled to, among other things, timely payment of wages earned, a minimum wage, and overtime pay, and may assert a private cause of action to enforce these rights. Independent contractors do not enjoy these protections. The legislative purpose behind the statute is “to protect employees from being deprived of the benefits enjoyed by employees through their misclassification as independent contractors.” 

The ABC Test. There is a presumption that “an individual performing any service” for a putative employer “shall be” considered an “employee” for purposes of the wage statutes. Once the individual has shown the performance of services for the putative employer, the alleged employer may rebut the presumption by establishing each of the following three prongs (known as the “ABC test”) by a preponderance of the evidence: 

“(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; and 

“(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.” (Id. at 360 citing G. L. c. 149, § 148B (a).) If any one of these criteria is not shown, the individual is an employee for purposes of the wage statutes. 

The plain language of the independent contractor statute neither expressly includes nor expressly excludes franchisees. The Court interpreted the Legislatures’ silence to indicate the Legislature intended the statute to be applied in the context of the franchise relationship, because the Legislature has in other instances demonstrated its intent to exclude certain categories of workers. The Court also stated that the independent contractor statute’s broad remedial purpose further bolstered this conclusion, asserting that “categorically excluding franchise relationships from the statute’s ambit would permit employers to evade obligations under the wage statutes merely by labeling what is actually an employment relationship as a “franchise” relationship, allowing employers to foil the legislative intent to protect workers as employees when they are, in fact, employees.” (Id. at 363, internal citations omitted). The Court also noted that it has previously rejected the argument (in the context of the taxicab industry) that the independent contractor statute should not apply where an industry is separately or even highly regulated. 

FTC Franchise Rule. The Court noted that the FTC Franchise Rule was adopted in the late 1970s in response to widespread deception in the sale of franchises. The FTC Franchise Rule considers a franchisor’s failure to provide presale disclosures specified in the rule to a prospective franchisee to be an unfair or deceptive act or practice in violation of section 5 of the Federal Trade Commission Act and related federal regulations. (Id. at 361.) The Court noted that under the FTC Franchise Rule, a “franchise” is defined as a continuing commercial relationship where, inter alia, 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,” citing 16 C.F.R. § 436.1(h)(2). (Id. at 361-62.) The Court noted on two different occasions that the required disclosures are triggered when a prospective franchisor makes one of two elections — either to exert a significant degree of control over the franchisee’s method of operation or to provide significant assistance in the franchisee’s method of operation. 

Court’s Analysis of the Purported Conflict Between the Independent Contractor Statute and the FTC Franchise Rule. In analyzing the possible conflict between the ABC test and the FTC Franchise Rule, as requested by the First Circuit, the Court concluded that there was no conflict, and that the purported conflict “rests on a misapprehension of what the [FTC Franchise Rule] requires — that is, timely disclosures to the prospective franchisee.” (Id.at 365.) The Court noted that providing Financial Disclosure Documents to prospective franchisees does not regulate the substantive terms of the franchisor-franchisee relationship. It further noted that compliance with the disclosure requirements does not mandate that a franchisor exercise any particular degree of control over a franchisee. (Id. at 365.) 

The Court pointed out that because it was analyzing a potential conflict between federal regulations and a state statute, the principles of preemption applied, and under those principles, the FTC Franchise Rule preempts the independent contractor statute only if the latter “actually conflicts” with the former in the sense that “it is impossible for a private party to comply with both state and federal requirements, or where state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” (Id. at 366; internal citations and quotations omitted.) The Court concluded that application of the independent contractor statute to franchisees does not actually conflict with the FTC Franchise Rule (Ibid.) The Court noted that the FTC Franchise Rule supports this conclusion, as it states that “[t]he FTC does not intend to preempt the franchise practices laws of any state or local government, except to the extent of any inconsistency with [the FTC Franchise Rule],” and that “[a] law is not inconsistent with [the FTC Franchise Rule] if it affords prospective franchisees equal or greater protection,” citing 16 C.F.R. § 436.10(b). (Id. at 366-67.) The Court asserted that a franchisor electing to exercise “a significant degree of control over the franchisee’s method of operation,” does not render every franchisee an employee under the first prong of the ABC test, noting that “the two tests are not the same,” because “control over the franchisee’s method of operation” does not require a franchisor to exercise “control and direction” in connection with the franchisee’s “performing any service” for the franchisor. (Id. at 367.) 

The Court then cited to multiple instances in other jurisdictions wherein a court had applied the ABC test to a franchise relationship, and not found an employment relationship to exist between franchisor and franchisee under the first prong (right to control) of the ABC test. The Court noted that in Goro v. Flower Foods Inc., the district court in the Southern District of California found that while a franchisor may dictate that a franchisee include certain food items on its menu, that does not mean that a franchisor must dictate the franchisee’s hiring decisions, the layout of its kitchen, or the wages it pays its employees. (Id. at 367.) Likewise, the Court noted that in the Central District of California, in Haitayan v. 7-Eleven, Inc., in applying the common law right to control test, akin to the first prong of the ABC test, the district court found that franchisors were not employees when franchisees controlled when they work, how much they work, and when they take vacations, employed multiple individuals, and exercised control over the hiring, firing, wages, discipline, scheduling, and staffing of their employees. 

The Court challenged 7-Eleven’s “dire predictions” that application of the ABC test to franchise relationships will end franchising in Massachusetts, noting that “other courts have done so apparently without the predicted apocalyptic end of franchise arrangements in their respective jurisdictions.” (Id. at 369.) More specifically, the Court addressed 7-Eleven’s contention that compliance with the FTC Franchise Rule necessarily renders every franchisee an employee for purposes of the wage statutes, and as a result, franchisors may not charge a franchise fee, thereby putting the entire franchise model in jeopardy. The Court asserted that 7-Eleven’s fear was based on the faulty premise that application of the ABC test will result in every franchisee being classified as an employee. And the Court noted that even if a franchisee were an employee, while the franchisor could not take franchise fees from wages, as that would be a prohibited assignment of an employee’s future wages, in appropriate circumstances, franchise fees could be deducted from gross revenue rather than from wages. 

The Court expressly stated that it did not express any opinion on how the ABC test would apply to the facts of the case. In response to this opinion, on April 1, 2022, the appellate court in the First Circuit, in Patel v. 7-Eleven, Inc. (Case No. 20-1999), issued the following order: “Upon consideration of the Massachusetts Supreme Judicial Court’s opinion dated March 24, 2022, the court directs the parties, within twenty days of the date of this order, to show cause, if any there be, why the judgment appealed from should not be summarily vacated and the case remanded to the district court for further proceedings.” So, it appears the case will proceed ahead in federal district court in Massachusetts. 

David M. Greeley, Esq. of Greeley Thompson, LLP prepared this Case Report. Mr. Greeley’s practice focuses on representing franchisors and franchisees in disputes. He may be reached at dgreeley@greeleythompson.com.