Duane Morris Takeaways – In Patel, et al. v. 7-Eleven, Inc., et al., 2022 WL 4540981, No. 17-11414 (D. Mass. Sept. 28, 2022), Judge Nathaniel Gorton of the U.S. District Court for the District of Massachusetts granted summary judgment in favor of 7-Eleven, as a franchisor, and denied Plaintiffs’ motion for class certification because franchisees were not employees under Massachusetts state law. In analyzing the state independent contractor statute, the Court determined that the obligations the franchisees undertook pursuant to the franchise agreement did not amount to “services” for purposes of the statute and Plaintiffs, therefore, were not employees. This ruling is important because it provides guidance for companies operating under a franchisor/franchisee business model on how to combat arguments that franchisee agreements create an employee/employer relationship and obligate franchisors to cover a myriad of legal costs for their franchisees.
Background Of The Case
Plaintiffs, a group of franchisee store owners and operators, brought a putative class action against 7-Eleven alleging that Defendant misclassified them as independent contractors in violation of the Massachusetts Independent Contractor Law. Id. at 1. Two of the named Plaintiffs entered into franchise agreements directly with 7-Eleven and three as corporate entities. Id. The franchise agreements outlined the obligations of the franchisees and included language that the franchisee agreed to hold itself out to the public as an independent contractor. Id. Under the agreement, the franchisee also agreed to pay several types of fees to 7-Eleven, including a franchise fee, gasoline fee, and down payment fee. Id. at 2. Plaintiffs filed a class action in Massachusetts state court and Defendant removed it on diversity grounds. Id. Both parties filed cross-motions for summary judgment, and Plaintiffs filed a motion for class certification. Id. The District Court granted summary judgment in favor of 7-Eleven, and Plaintiffs appealed to the First Circuit where the case was remanded to allow the District Court to first weigh on the issue, which the First Circuit certified as “[w]hether the three-prong test for independent contractor status … applies to the relationship between a franchisor and its franchisee…” Id.
On remand, the District Court analyzed the elements for the independent contractor test under Massachusetts law, including: (1) freedom from control and direction; (2) service is performed outside the usual course of business; 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. Id. at 3. Defendant argued that franchisees do not perform services for 7-Eleven, and in fact, 7-Eleven actually provides services to the franchisee in exchange for payment; and that 7-Eleven was not a direct employer where the franchise agreement was entered into by corporate entities. Id. at 4.
The District Court based its ruling on the threshold inquiry of determining whether the individual performs any service for the alleged employer. Id. Plaintiffs argued that because the franchise agreement required them to work full time in the store, operate the store 24 hours a day, record inventory sales, wear approved uniforms and use 7-Eleven payroll system, in addition to submitting cash reports and depositing receipts, they should be deemed employees, not independent contractors. Id. at 5. The District Court, however, was not convinced that the contractual obligations outlined in the franchise agreement, alone, constituted services under Massachusetts law regarding independent contractors. Id. Moreover, the District Court opined that although the parties do have mutual economic interests, even though both profit from the franchise stores’ revenue, that mutual interest was not enough to establish that plaintiffs provide services to support an employee relationship. Id.
In short, the District Court reasoned that where a franchisee is merely fulfilling its contractual obligations under a franchise agreement, that by itself does not refute the independent contractor status. Id. The District Court therefore granted 7-Eleven’s motion for summary judgment and denied Plaintiffs’ motion for class certification. Id. at 6.
Implications For Employers
For those companies with franchisee operations, this ruling supports the position that obligations under a franchise agreement requiring the franchisee to perform certain tasks does not establish an employment relationship. And the fact that the franchisor provides services to the franchisee for payment actually cuts against the employee designation. Further, the simple fact of mutual benefit from business revenues does not help establish employee status under these circumstances. Although an appeal from Plaintiffs is anticipated, the District Court’s analysis offers solid guidance for franchisors who are operating under similar franchise agreements.