Patel, Et Al. v. 7-Eleven, Inc., Et Al ' While The Massachusetts' Independent Contractor Statute May Apply To Franchise Relationships, The SJC's Decision Actually Offers Protection For Franchisors

• Published date: 31 March 2022
• Subject Matter: Corporate/Commercial Law, Employment and HR, Corporate and Company Law, Employee Benefits & Compensation, Franchising
• Law Firm: Seyfarth Shaw LLP
• Author: Mr John Skelton, Anthony S. Califano and Keval D. Kapadia

Introduction

On March 24, 2022, the Massachusetts Supreme Judicial Court ("SJC") issued a much-anticipated decision in Patel, et al. v. 7-Eleven, Inc., et al. answering a certified question from the United States Court of Appeals for the First Circuit concerning the application of the Massachusetts independent contractor law ("ICL") to franchise relationships. The SJC found there is no conflict (and thus no preemption) between the "freedom from control" requirement under Prong A of the ICL and the Federal Trade Commission ("FTC") Franchise Rule (the "FTC Franchise Rule") which includes franchisor control as a potential element of a franchise relationship.

While some may see the SJC's ruling as a boon for potential franchise misclassification claims, the SJC was careful to limit the scope of the ruling and actually offers useful guidance for franchisors. First, the SJC confirmed the importance and protection of legitimate franchise relationships. Second, and significantly, it made clear that before any consideration of the ICL's three prongs, there is a threshold question: a franchisee claiming to be a misclassified employee must first establish that the franchisee is an "individual performing any service" for the franchisor. Patel v. 7-Eleven, Inc., No. SJC-13166, 2022 WL 869486, at *1 (Mass. Mar. 24, 2022). This is significant because franchisors don't pay franchisees for services. Rather, franchisees pay franchisors, commonly through an upfront fee and ongoing royalties, for a license to use the franchisor's trademarks and business format to operate an independent business associated with the franchisor's brand. Indeed, as defined under both the FTC Franchise Rule and various state franchise relationship laws, a "franchise" (and thus a franchise relationship) is an ongoing commercial relationship where a franchisee operates an independent "business" associated with the franchisor's trademark. Thus, this threshold providing services question should mean that for franchisors with true franchise relationships where franchisees operate independent businesses (as opposed to those designed to evade wage and hour laws) the ICL's three--prong test simply will not apply.

Case Background and Decision

The Massachusetts ICL establishes a three-pronged "ABC" test to determine whether someone is an employee or an independent contractor. If an individual performs services for the putative employer, the ICL presumes employment status, which the putative employer can overcome by establishing:

1. the individual is free from control and direction in performing services;
2. the service performed is outside of the putative employer's usual course of business; 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.

In Patel, several 7-Eleven franchisees allege they are actually employees misclassified as independent contractors. See Patel v. 7-Eleven, Inc., 8 F.4th 26, 28 (1st Cir. 2021). On cross motions for summary judgment, citing Monell v. Boston Pads, LLC, 471 Mass. 566 (2015), the Federal District Court found that the ICL did not apply to a franchisor / franchisee relationship because "there is an 'inherent conflict" between Prong A which requires the "worker" be "free from control in connection with the performance of the service" and the FTC Franchise Rule which contemplates a franchisor will "exert or [have] authority to exert a significant degree of control over the franchisee's method of operation . . . ." Patel v. 7-Eleven, Inc., 485 F. Supp. 3d 299, 309 (D. Mass. 2020). Plaintiffs appealed. Focusing on that conflict, the First Circuit certified the following question: "[w]hether the three-prong test for independent contractor status set forth in [G. L. c. 149, ' 148B,] applies to the relationship between a franchisor and its franchisee, where the franchisor must also comply with the FTC Franchise Rule [16...