By Jeffrey M. Rosin
For more than two decades, private plaintiff lawsuits or government inquiries, audits, and investigations have challenged traditional franchisor-franchisee relationships in Massachusetts. Among the litigated issues is the claim that a franchisor-franchisee relationship is not a true business-to-business or independent contractor relationship but, rather, a disguised employment relationship. These legal challenges occur primarily in the commercial cleaning industry with local Massachusetts defendants, as well as national and international franchise brands. However, in one of the more prominent cases outside of the commercial cleaning industry, plaintiff-franchisees challenged their relationships with the 7-Eleven franchise brand.
To assess these challenges to the legitimacy of a franchisor-franchisee relationship, courts and government auditors have looked to state and federal independent contractor law and interpreted that law in the context of the facts at issue pertaining to the franchise relationship.
For their part, franchisors have consistently argued that, given the requirements of franchisors under franchise and trademark laws applicable to them, the independent contractor versus employee analysis is squarely at odds and cannot be reconciled. Franchisors argue that they should not be subject to misclassification laws at all. The recent case of Patel v. 7-Eleven illustrates this dispute.
The Patel v. 7-Eleven Question
On August 9, 2021, the U.S. Court of Appeals for the First Circuit certified a question to the Massachusetts Supreme Judicial Court (“SJC”) in Patel v. 7-Eleven, Inc, 8 F.4th 26 (1st Cir. 2021). The question sought to resolve whether the “control of a franchisee” required of a franchisor by the Federal Trade Commission (“FTC”) rule, 16 C.F.R. § 436.1(h)(2), conflicts with and is irreconcilably inconsistent with the “control” that can make an independent contractor an employee under the Massachusetts Independent Contractor law (“MICL”), G.L. c. 149, §148B(a)(1). In other words, when evaluating a franchisee’s assertion that it is a misclassified employee of the franchisor, can a court hold the franchisor’s controls of the franchisee against the franchisor despite the fact that a franchisor is required to have those controls in order to be a franchisor?
In Patel, the federal District Court (Gorton, J.), on summary judgment ruled that it was impossible for a franchisor to satisfy both laws and concluded that the franchisor had not misclassified franchisees under Massachusetts law. See Patel v. 7-Eleven, Inc., 485 F. Supp. 3d 299, 307 (D. Mass. 2020). The First Circuit recognized on appeal that the SJC has not “analyzed the interactions between the ICL and the FTC Franchise Rule” and certified to the SJC this important question of law. See 8 F.4th 26.
The MICL requires that a putative employer prove, among other things, that the individual asserting the employment relationship “is free from control and direction with the performance of the service, both under his contract for the performance of service and in fact.” See G.L. c. 149, § 148B(a)(1). A putative employer’s inability to prove that alone will render the contractor an employee. At the same time, the FTC requires that, to be a franchisor, “[t]he franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation[.]” 16 C.F.R. § 436.1(h)(2).
As the First Circuit noted, “considering the text” of these sections of law, there “appears to be a conflict” and “it appears difficult, if not impossible, for a franchisor to satisfy [both laws].” 8 F.4th at 28. Accordingly, the First Circuit certified the following question to the SJC:
Whether the three-prong test for independent contractor status set forth in the Mass. Gen. Laws ch. 149 § 148B applies to the relationship between a franchisor and its franchisee, where the franchisor must also comply with the FTC Franchise Rule.
Of note, this question was part of what was presented (but not decided) almost a decade ago in Depianti v. Jan-Pro Franchising International, Inc. (“JPI”), 465 Mass. 607 (2013). There, the federal District Court (Wolf, J.) certified the question as to whether the MICL could be applied to JPI at all. JPI was a national franchisor with a three-tiered franchise system, whereby it had no contract with the plaintiff-franchisee at issue. JPI’s regional franchise owner, BradleyMktg Enterprises, was the Massachusetts regional franchisor who sold the plaintiff a franchise. Thus, when the plaintiff-franchisee sued JPI for misclassification, JPI argued the MICL could not be applied to it, because textually, the MICL requires there be a contract between the parties to give rise to a claim. The District Court certified the question of whether a contract was required between the parties to prove a claim under the MICL.
The Depianti parties also argued about whether the MICL could be squared with the FTC Franchise Rule, but the SJC did not reach that issue. The SJC held that the MICL could be applied to JPI, despite the lack of a contract between them and specifically chose not to weigh in on whether or how to apply the MICL factors to JPI. That said, when the District Court applied the MICL, it granted summary judgment to JPI, following the reasoning of, and finding res judicata based on, a final judgment in Georgia on the matter between the same parties. See Depianti v. Jan-Pro Franchising Int’l, Inc., 39 F. Supp. 3d 112, 129 (D. Mass. 2014) (citing Jan-Pro Franchising Int’l, Inc. v. Depianti, 712 S.E. 2d 648, 652 (Ga. Ct. App. 2011), rev. denied). The Depianti ruling was affirmed on appeal to the First Circuit on September 29, 2017. See Depianti v. Jan-Pro Franchising Int’l, Inc., 873 F.3d 21 (1st Cir. 2017).
The Depianti ruling and other precedent may superficially suggest that the MICL factors can be applied to a third-party franchisor, but no decision truly reached this exact and critical issue. For example, in Awuah v. Coverall North America, Inc., 460 Mass. 484 (2011), the SJC received certified questions in a franchise case where the U.S. District Court (Young, J.) had already ruled that the franchisees were misclassified, and the SJC was simply asked about permissible damages under the MICL. In Coverall North America, Inc. v. Commissioner of Division of Unemployment Assistance, 447 Mass. 852 (2006), the SJC looked at the claims that a franchisee was misclassified under certain subparts of the MICL and found that the evidence at a Department of Unemployment proceeding sufficiently supported a finding of misclassification. And, in a more recent case, Jinks v. Credico (USA) LLC, 488 Mass. 691 (2021), the SJC clarified the narrow circumstances in which the MICL could be applied to a third party: (1) where there is “corporate disregard” of the intermediate entity, or (2) where the third party really set up the intermediate entity for the purpose of evading the wage laws. In Jinks, the SJC thus clarified that this was, in effect, its ruling on the certified question in Depianti. Thus, the question remained: can the MICL factors be applied to a franchisor in a direct relationship with a franchisee or are they inconsistent?
The SJC Answers the Patel v. 7-Eleven Question
In Patel, the SJC for the first time expressly decided whether the “control” subpart of the MICL can be squared with the FTC Franchise Rule that requires such “control.” Patel v. 7-Eleven, Inc., 489 Mass. 356 (2022). The SJC rejected 7-Eleven’s argument that the two laws could not be reconciled. Relying on time-honored principles of statutory construction, the SJC hesitated to read statutes in conflict where the legislature was silent on the matter, and where they could be read harmoniously. And that is what the SJC did: it read the statutes harmoniously and, in so doing, offered franchisors substantial guidance.
The SJC reasoned that, just because a franchisor will have control over the franchisee’s “methods of operation” does not mean it will have “control and direction” over the franchisee’s “services performed.” This is significant because it signals that for a franchisor to simply have, for example, an Operations Manual, software to use, procedures to follow, or colors, logos, and uniforms for employees to wear, does not mean it is controlling “services.”
In Patel, the SJC cited two California decisions that conducted a nuanced analysis. See Goro v. Flowers Foods, Inc., No. 17-CV-2580 TWR (JLB), 2021 WL 4295294, at *10 (S.D. Cal. Sept. 21, 2021) (“For example, the phrase ‘method of operation’ in the FTC Franchise Rule is broader than the phrase ‘performance of . . . [services]’ appearing in the [independent contractor misclassification] test. While a franchisor may dictate that a franchisee include certain food items on its menu, that does not mean that a franchisor must dictate the franchisee’s hiring decisions, the layout of its kitchen, or the wages it pays its employees.”); Wickham v. Southland Corp., 213 Cal. Rptr. 825, 828-29 (Cal. Ct. App. 1985) (finding franchisor’s exercise of significant control over business operations not equivalent to control over franchisee’s performance of services where franchisee hired and fired, set wages for and instructed employees, and controlled day-to-day store operations).
The SJC’s focus on the word “service” and whether the franchisor is controlling that “service” is significant because, according to the SJC, that “service” is represented by such matters as hiring decisions and wages paid. Accordingly, a franchisor who does not participate in a franchisee’s hiring decisions or interfere with decisions on wages to pay a franchisee or its employees should be found to not be controlling the “services” being provided. In fact, this confirms that a franchisor—particularly a third-tier master franchisor, such as existed in the SJC’s landmark Depianti decision, which plays no role in “hiring” or “setting wages”—can readily prove a “lack of control” under this part of the MICL.
For that proposition, the SJC again cited California precedent, as well as two other 7-Eleven decisions from California and New Jersey, to further demonstrate the validity of its analysis. See Haitayan v. 7-Eleven, Inc., 2021 WL 4078727, at *27-53 (C.D. Cal. Sept. 8, 2021) (applying common-law right to control test, akin to first prong of ABC test, and finding franchisees were not employees where franchisees controlled “when they work, how much they work, and when they take vacations,” employed multiple individuals, and exercised control over “the hiring, firing, wages, discipline, scheduling and staffing of their employees”); 7-Eleven, Inc. v. Sodhi, 2016 WL 3085897, at *6 (D.N.J. May 31, 2016) (determining franchisee was not employee under Fair Labor Standards Act’s definition of “employee,” which includes analysis of right to control similar to first prong of ABC test, where, inter alia, franchisee did not have regular schedule, wore specified uniform only sporadically, traveled around country on business unrelated to franchisor, was “hands off” in his management of convenient store, had other business ventures, and set store prices).
In Patel, the SJC also put to rest another misunderstanding when it comes to analyzing whether a franchisor has misclassified a franchisee. That is, the SJC recognized that all franchisors receive an “economic benefit” from franchisees, inherent in the franchise relationship. Franchisees arguing misclassification have contended that, because their work benefits the franchisor economically, they are akin to employees. However, the Patel court made clear that “performing service” for the franchisor “is not satisfied merely because a relationship between the parties benefits their mutual economic interests.” See 489 Mass. at 411.
Significantly, the SJC cited the critical ruling in Georgia for Jan-Pro Franchising (489 Mass. at 368), whereby a third-tier master franchisor proved not just that it did not control the franchisee at issue, but all other subparts of the MICL itself. See Jan-Pro Franchising Int’l, Inc. v. Depianti, 712 S.E. 2d at 651. As that Georgia decision is a positive ruling for franchisors under Massachusetts law, the SJC has made clear that any effort to make the argument that this Georgia ruling is not good law under the MICL is wrong.
Finally, in Patel, the SJC offered guidance on another matter: the requirement of law that franchisors must charge franchisees a fee for franchisees to buy into the system. The SJC validated this component of franchising and noted that this fee is legitimate, even in a misclassification scenario. As the SJC pointed out, as long as the franchise fee does not impair any supposed misclassified franchisee’s right to the minimum wage and other wages, it can be found legitimate.
The Resolution of Patel v. 7-Eleven
The SJC’s decision was not the end of the inquiry. The parties returned to the First Circuit, which then certified a second question:
Do Plaintiffs ‘perform[ ] any service’ for 7-Eleven, within the meaning of Mass. Gen. Laws ch. 149, §148B, where, as here, they perform various contractual obligations under the Franchise Agreement and 7-Eleven receives a percentage of the franchise’s gross profits?
Patel v. 7-Eleven, Inc., 81 F.4th 73, 76 (1st Cir. 2023).
Each of the three subparts of the MICL references the putative employer’s need to prove something about the “services performed” by the putative independent contractor in order to show an independent contractor relationship. In 2024, the SJC answered “no,” holding that the plaintiffs performed service for themselves, and not 7-Eleven. See Patel v. 7-Eleven, Inc., 494 Mass. 562, 562 (2024). The fact that they were cloaked and branded with 7-Eleven trademarks, operated according to 7-Eleven protocols, and were provided with resources, training, and equipment by 7-Eleven did not mean they provided service for 7-Eleven. Id.
The SJC further articulated the requirements under the MICL and explained why it is difficult to examine whether a franchise relationship is an employment relationship given the law’s requirements and the very nature of the franchise relationship itself. The SJC reasoned that the mere “franchise” label did not change the analysis. Neither did 7-Eleven providing a license to use the brand trademarks, processes, or systems, or even its receipt of fees from the use of those matters, change the analysis. The SJC further stated that the Attorney General’s viewpoint in other cases regarding the receipt of fees and what those fees are for should not be determinative either.
As the SJC stated, “[i]f, as contended by the plaintiffs, operating the convenience stores in compliance with these obligations were considered ‘performing any service,’ all typical franchise relationships would be presumptive employment relationships. We reject such an unreasonable construction.” Id. at 576 (footnote omitted).
On the facts of Patel, then, and in an examination of the totality of circumstances, including the obligations of franchisors under trademark laws, the court found that the franchisees did not perform services for 7-Eleven within the meaning and purpose of the MICL. Instead, they performed services for themselves—i.e., for their own businesses and not for the franchisor’s business.
Patel v. 7-Eleven has put a number of questions and arguments to rest when it comes to franchise misclassification. This clarity will, no doubt, offer substantial guidance for franchisors in Massachusetts going forward, but it will most importantly, give a roadmap for courts analyzing franchise misclassification cases in the future.
Jeffrey Rosin is a founding partner, and the managing partner of the Boston office of O’Hagan Meyer. He leads the firm’s franchise industry practice group.
