The Supreme Judicial Court of Massachusetts, answering a certified question, has ruled that five 7-Eleven franchisees were independent contractors, not misclassified “employees,” under the Massachusetts Independent Contractor law.
According to the Court, the franchisees did not perform any services for the convenience store chain but rather were operating their own independent businesses using 7-Eleven’s business format, trademark, and good will.
This was the second ruling by this Court involving these plaintiffs and 7-Eleven. In the first, issued in March 2022, the Court ruled that where a franchisee was an “individual performing any service” for a franchisor, the so-called “ABC Test” for independent contractor status applied to the relationship between the franchisor and the individual. In doing so, the Court rejected 7-Eleven’s argument that the ABC Test conflicts with the franchisor’s disclosure obligations prescribed by the Federal Trade Commission’s Franchise Rule.
After the 2022 decision was issued, the U.S. Court of Appeals for the First Circuit sought more guidance by issuing a second certified question:
Do the plaintiffs “perform any service” for 7-Eleven within the meaning of the [Massachusetts Independent Contractor law], where, as here, they perform various contractual obligations under the Franchise Agreement and 7-Eleven receives a percentage of the franchises’ gross profits?
Given the 2022 ruling, many in the franchisor community were worried about how the Court would answer the second certified question. But the latest decision, issued earlier this month, was a big victory for 7-Eleven. The Court found that the franchisees were not providing services to 7-Eleven in the operation of their franchised convenience stores. Therefore, the ABC Test did not apply.
The Court’s recent ruling underscores the unique nature of franchise relationships, which, when properly implemented, allow franchisees to operate as independent business owners rather than as employees of the franchisor while preserving the franchisor’s ability to safeguard its brand standards and facilitate a beneficial economic relationship between the parties.
Patel v. 7-Eleven, Inc.
In 2017, five plaintiff franchisees of 7-Eleven – some operating as individuals and others through corporate entities – sued 7-Eleven, arguing that they were misclassified as independent contractors rather than employees under the Independent Contractor law. The law provides that “an individual performing any service” is presumed to be an employee unless the employer can demonstrate all three of the following:
- 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.
- The service is performed outside the usual course of the business of the employer.
- 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.
This is commonly known as “the ABC Test.”
The Court’s answer to the second certified question was grounded in the fact that the franchisees own and operate convenience stores in Massachusetts and license the right to use the 7-Eleven branded method of operating a convenience store. According to the Court, “having determined that purchasing the 7-Eleven brand, know-how, and goodwill made more financial sense for their business,” each of the franchisees entered into a franchise agreement with 7-Eleven “requiring them to operate their convenience stores so as to maintain the integrity of the 7-Eleven business format franchise” and paid a franchise fee in this arrangement.
Analysis and conclusion
As noted above, the Court concluded that the franchisees did not “perform any service” for 7-Eleven within the meaning of the statute. Thus, the Court has confirmed that before any of the three prongs of the ABC Test is considered, there must be evidence that the individual – in this case the franchisee – performs a service that aligns with an employment relationship.
The Court emphasized several factors in deciding that the franchisees did not meet this threshold requirement for “employee” status:
Independence. According to the Court, the plaintiff franchisees chose to operate independent stores under the 7-Eleven brand, paying a franchise fee for the right to use the franchisor’s “brand, know-how, and goodwill.” This distinguished them from traditional employees, who typically work directly under the employer’s control without making such business investments.
Brand standards versus employment control. Although 7-Eleven required the franchisees to adhere to strict operational standards – such as wearing uniforms, maintaining specific inventory, and complying with marketing guidelines – these requirements were necessary for preserving the brand’s integrity to avoid potential loss of the brand under federal law, as opposed to control over an employee’s work.
No direct service to 7-Eleven. Unlike employees, the franchisees did not provide labor directly benefitting 7-Eleven’s business operations. Instead, their activities were directed toward their own businesses, benefitting from the 7-Eleven system that they chose to use.
Economic structure of the franchise model. The revenue arrangement between the franchisees and 7-Eleven – where the franchisees paid a percentage of their gross profits to the franchisor – was consistent with standard franchise models and did not resemble a typical employer-employee compensation structure. The Court said that it did not matter whether the arrangement was for a flat fee or a percentage-based royalty.
Implications
The ruling in Patel v. 7-Eleven reaffirms the principle that franchise relationships – characterized by a contract permitting the use of a franchisor’s brand and requiring adherence to brand standards in return for payments that are often calculated based on the franchisee’s profits – differ in significant ways from a traditional employment relationship. By determining that these 7-Eleven franchisees did not “perform any service” within the meaning of the Independent Contractor law, the decision emphasizes the independent nature of franchise businesses, and reinforces the legal distinctions that protect both franchisors’ and franchisees’ economic interests. As franchising continues to grow, this decision is likely to serve as an essential reference point in future classification battles.
However, the Court also emphasized that labels are insufficient, and focused on the specifics of the parties’ arrangement. Thus, Massachusetts businesses should expect courts to continue to take a nuanced approach. Businesses should also be prepared for the courts to find an “employment” relationship if there are indications of a lack of franchisee independence, or greater control over the franchisee than is necessary to protect the franchisor’s brand.