On September 10, 2020, the United States District Court for the District of Massachusetts issued a Memorandum and Order granting summary judgment in favor of a franchisor in response to claims by a purported class of franchisees that they were not truly independent contractors, but employees of the franchisor. This ruling is particularly applicable to retailers using the franchise business model (especially those in Massachusetts), as it aids in the preservation of the franchise business model and the rights of franchisors to operate in compliance with federal law.
The main issue was whether a specific federal legal requirement that is imposed upon franchisors trumps the general Massachusetts independent contractor classification statute. The federal court reasoned that applying the Massachusetts independent contractor classification statute to the franchise business model would render franchisors regulated by the Federal Trade Commission (“FTC”) criminally liable under state law for employee misclassification simply by virtue of their compliance with the FTC’s requirements.
In a dispute between a class of franchisees (the “Franchisees”) and 7-Eleven, Inc. (“7-Eleven”), the Franchisees sued 7-Eleven alleging that 7-Eleven misclassified its own Franchisees as independent contractors, instead of as employees. The Franchisees brought their claims under the Massachusetts Independent Contractor Law (“ICL”), arguing that 7-Eleven could not overcome the presumption of an employee/employer relationship established by the ICL. The ICL incorporates the three-prong “ABC” test applied in many states nationwide, which presumes that an individual who performs any service is an employee of a purported employer unless the purported employer can satisfy the test.
7-Eleven argued that the FTC Franchise Rule makes it impossible for it to satisfy the first prong of the ABC test. The Court compared the first prong of the ABC test, which requires purported employers to demonstrate that individuals are free from control and direction in connection with the performance of services, with the FTC Franchise Rule, which in-part provides that the FTC Franchise Rule does not cover business relationships unless a franchisor exerts or has authority to exert a significant degree of control over, or provides significant assistance in, the franchisee’s method of operation.
The Court examined the FTC’s guidance on the FTC Franchise Rule to determine whether the “significant degree of control” or “significant assistance” required by the FTC Franchise Rule conflicts with the ABC test’s “free from control” requirement. The FTC’s guidance provides that “significant” control or assistance includes control over or assistance with:
- store design and appearance;
- accounting practices and establishing accounting systems;
- sales, repair, or business training programs;
- hours of operation; and
- personnel policies and advising on personnel matters.
The Court observed that the control and assistance identifiers listed in the FTC’s guidance were nearly identical to the examples of control offered by the Franchisees to establish that 7-Eleven could not satisfy the first prong of the ABC test.
Here, the Court cited Massachusetts state precedent in support of 7-Eleven’s argument, which establishes that the ICL is inapplicable where a competing statutory scheme makes it impossible to satisfy one of the prongs of the ABC test. Even though the Court confined its holding to employee classification under the ICL, it did note that a decision establishing that qualifying franchisees under the FTC Franchise Rule are necessarily employees would “eviscerate the franchise business model,” which is a federally defined and regulated business construct. While presently subject to threats of appeal, franchisor and franchisee retailers can rest a bit easier as this decision is still a significant win in the battle for the preservation of the franchise business model.