A recent United States District Court ruling for the District of Massachusetts has the potential to impact franchisor-franchisee relationships in other states with laws similar to the Massachusetts Independent Contractors Act (” ICL ”) and which could otherwise conflict with the requirements of a regulatory regime. [Patel v. 7-Eleven, Inc., et al., No. 1:17-cv-11414-NMG, 2020 WL 5440623 (D. Mass. Sept. 10, 2020)].
The court case
In Patel v. 7-Eleven, the franchisees filed a class action lawsuit alleging that 7-Eleven falsely classified them as independent contractors when in fact they were employees under the Massachusetts REBA. Massachusetts ICL [Mass. Gen. Law Ann. Ch. 149, Section 148B(a)] assumes that workers are considered employees of an employer and are not independent contractors, unless the employer can demonstrate that each of the following three elements is satisfied (“ABC test”):
- The individual is free of control and direction in the performance of the service, both contractually and in fact;
- The service is rendered outside the ordinary course of the employer’s business; and
- The individual is usually engaged in a trade, occupation, profession or business of the same nature as that involved in the service rendered.
According to the franchisees, 7-Eleven exercised “significant control” over them as part of their franchise agreement and when the franchisees provided “services” for 7-Eleven. In support of their argument, the franchisees provided a long list of examples describing when 7-Eleven exercised control both in the franchise agreement and in day-to-day operations.
7-Eleven sought summary judgment on the basis that the Federal Trade Commission franchise rule (“FTC franchise rule”) [16 C.F.R. § 436.1] and Lanham Law [15 U.S.C. § 1127] make it impossible to complete the ABC test as there is a level of control required under the FTC franchise rule that directly conflicts with the first leg of the ICL test. Franchisees argued that courts routinely applied the ABC test to franchisors and that 7-Eleven incorrectly interpreted the first prong of the ICL as requiring individuals to be completely free from the control of the franchisor to qualify as an entrepreneur. independent during the preemption argument.
The court’s decision
The court recognized that, by definition in the FTC Franchise Rule, a franchise requires that a franchisor exercise or have the power to exercise significant control over the franchisee’s methods of operation or provide significant assistance to the franchisee. franchisee operating method. According to the court, this level of control under the FTC Franchise Rule was in direct conflict with the requirement in the first branch of the LCI to classify a person as an employee unless he or she is free from control and control. direction when providing services.
In granting summary judgment to 7-Eleven, the court relied on a case presenting a similar conflict between state law and regulatory law (Monell v Boston Pads, LLC, 31 NE3d 60 (Mass, 2015)). In Monel, the Massachusetts Supreme Judicial Court concluded that where there is an inherent conflict between a regulation that makes it impossible to satisfy a component of the REBA, the specific regulatory regime controls the REBA. In Patel, the court also found that the FTC’s franchise-specific regulatory provisions prevail over the more general LCI independent contractor test.
The Patel court accepted the first argument of the franchisees, that is to say, that courts consistently applied the ABC test to franchisors, was unconvincing because the cases cited predated Monell or poorly enforced laws outside of Massachusetts that were not subject to Monell. In addition, the court accepted the second argument of the franchisees, that is to say, that 7-Eleven’s preemption theory required that an individual be completely free from all control to be an independent contractor, also failed because the FTC franchise rule requires more than “some” control and that a franchisor must in fact exercise “substantial” control in order to comply with the FTC franchise rule.
The Patel The court determined that simply qualifying as a franchisee under the FTC Franchise Rule does not automatically make the franchisee an employee for purposes of the LCI. The Patel The court ruled that this would “effectively crowd out the franchise business model” and make those subject to the FTC Franchise Rule criminally liable for incorrectly identifying their franchisees as independent contractors. The Patel The court noted that where this type of conflict exists, the franchise-specific regulatory provisions of the FTC Franchise Rule take precedence over the more general ICL independent contractor test. For these reasons, the Patel The court ruled that the Massachusetts REBA did not apply to 7-Eleven in the circumstances.
Implications for franchisee-franchisor relationships
The 7 eleven The ruling is a limited one because it only applies to the relationship between the Massachusetts ICL and the FTC Franchise Rule. However, this could have broader potential implications for franchisee-franchisor relationships nationwide. Currently, more than 30 states apply some form of the ABC test to determine independent contractor status. Although it does not control in other jurisdictions, the 7 eleven The decision can certainly be instructive when there are challenges in other states to classifying a franchisee as an independent contractor or employee and has been cited in similar cases in California and Illinois.