From JDSupra, Peter Lawrence Loh and Elizabeth Stone discuss a recent decision in Massachusetts in which the court said that the Federal Trade Commission’s Franchise Rule took precedence over Massachusetts’ independent contractor statute and said the Massachusetts statute did not apply. Peter and Elizabeth write:
A recent decision from a federal court in Massachusetts is a significant victory for franchisors who continue to face lawsuits alleging they have misclassified their franchisees as independent contractors rather than employees. In Patel v. 7-Eleven, Inc., franchisees brought a putative class action alleging that 7-Eleven’s misclassification of its franchisees violated Massachusetts wage and hour laws.1 The franchisees argued the level of control that 7-Eleven exerted over them transformed them into employees, entitling them to the benefits and protections of Massachusetts labor laws, specifically Massachusetts’ Independent Contractor Law (“ICL”).
The ICL uses a three-pronged standard, or what is commonly referred to as the “ABC test,” requiring an alleged employer accused of misclassification to demonstrate:
(1) The worker at issue is free from control and direction in the performance of the service provided, both under his contract for the performance of the service and in fact;
(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.2
In order to demonstrate 7-Eleven’s level of control, the franchisees pointed to 7-Eleven’s daily communications with the franchisees, inspections of their stores, and “exacting” standards regarding cleanliness, inventory, and hours of operation. The franchisees also pointed to requirements that they wear uniforms and utilize 7-Eleven payroll systems.
7-Eleven countered that the franchisees were responsible for hiring, training, compensating, and managing all store employees, and for the payment of taxes. Nonetheless, 7-Eleven conceded that it did exert some control over its franchisees but only in order to comply with federal regulation. Specifically, the Federal Trade Commission’s Franchise Rule requires that “[t]he franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation.”3 The FTC’s guide accompanying this rule lists examples of the “significant control” franchisors should exercise, including control over franchisees’ hours of operation, accounting practices, and personnel policies.4
The court took note of this “inherent conflict” and held that the specific requirements of the Franchise Rule trumped the general precepts of the ICL’s ABC test.5 This meant the FTC’s “franchise-specific regulatory regime … governs over the general independent contractor test in Massachusetts.”6 As a result, Massachusetts’ ICL did “not apply to 7-Eleven.”7 The court accordingly denied the franchisees’ summary judgment motion and, more importantly, their request for class certification.8
This decision is a victory for franchisors amidst the growing popularity of franchisees’ misclassification suits. Franchisors across the country facing similar challenges will likely invoke the court’s reasoning in Patel v. 7-Eleven—that the FTC’s Franchise Rule requires franchisors to exert “significant” control over franchisees, which takes precedence over states’ general labor laws to the contrary. Under this holding, franchisees may have a harder time establishing the ABC test’s first factor dealing with a franchisor’s control over the work performed.
1 Case No. 1:17-cv-11414-NMG (D. Ma. Sept. 10, 2020) (Dkt. 169).
2 Mass. Gen. L. c. 149, § 148B(a)(1)-(3).
3 16 C.F.R. § 436.1(h); 15 U.S.C. § 57a(a); 16 C.F.R. § 436.1 et seq; 72 Fed. Re. 15,444, 15,445 (March 30, 2007).
5 Patel, Case No. 1:17-cv-11414-NMG, at 22–23.
6 Id. at 23.
8 Id. at 24-25.