7-Eleven, Franchisees Renew Battle Over What Defines a Worker

7-Eleven Inc. and some of the company’s Boston-area franchisees will go toe to toe at the First Circuit on Wednesday in a fight over whether Massachusetts law extends employee protections to those who operate the ubiquitous convenience stores.

The franchisees say a lower court wrongly concluded that they don’t perform services for the company and refused to apply Massachusetts’ “ABC test” for determining whether those who run the stores are employees or independent contractors, contradicting a 2022 state high court answer to a certified question earlier in the suit’s judicial odyssey.

The c-store chain urges the US Court of Appeals for the First Circuit to leave the lower court’s decision in place.

The lawsuit, 7-Eleven’s lawyers said in their appellate brief, is an attempt to turn the state’s independent contractor law “into something it was never intended to be—a tool for business owners, like Plaintiffs, to recover as ‘damages’ three times the value of their business’s operating expenses, including their payroll and the fees they pay for their franchise rights.”

The franchisees, of course, disagree.

The dispute began with a 2017 would-be class action in state court alleging that 7-Eleven misclassified the store operators as independent contractors when they’re really employees entitled to greater protections under state law, such as minimum wage. The company removed the suit it says was brought by two individual franchisees and three other people who own companies that own franchises to federal court that year.

Worker misclassification is a substantial issue in Massachusetts, the state said in a brief it filed in support of the franchisees. Misclassification “inflicts enormous economic harm on workers,” disadvantages businesses that classify workers properly, and costs governments billions of dollars in revenue each year, according to the amicus brief.

The case went before the First Circuit for the first time in 2021, when the appellate judges sought that input from the Massachusetts Supreme Judicial Court on a potential clash between state law and a federal franchise rule.

The resulting SJC decision “put to rest” the argument that franchisees can’t be employees under Massachusetts law, Shannon Liss-Riordan, who represents the franchisees, told Bloomberg Law.

The dispute presents a significant state law issue, which could have a “massive impact” on enforcing Massachusetts’ “very strict” contractor law, so the First Circuit should send the case back to the SJC if it has “any doubts” about application, the franchisees’ brief said.

However, the hope is that the First Circuit rejects the outcome below “out of hand,” Liss-Riordan said.

Massachusetts in its brief backed the franchisees’ request, although 7-Eleven argues there’s no reason for another delay.

ABC Test, Services

The case has “already gone up and down so many times,” Catherine Ruckelshaus, the National Employment Law Project’s legal director and general counsel, told Bloomberg Law. That “evades” the real problem, which is that these workers say they’re owed pay and they’re still fighting for it nearly six years after filing their state-court suit, she said.

Under the Massachusetts three-pronged “ABC test,” most workers who perform any service are considered employees by default.

For them to be independent contractors instead, they must be free from control and direction, their service must be performed outside the employer’s usual course of business, and they must be customarily engaged in independently established work of the same nature as that involved in the service they’re performing.

The Supreme Judicial Court in March 2022 ruled that the state’s Independent Contractor Law—which includes the test—doesn’t inherently conflict with a Federal Trade Commission franchise rule addressing a franchisor’s degree of operating control, and applies when a franchisee performs a service for a franchisor such as 7-Eleven.

The First Circuit thereupon vacated 7-Eleven’s earlier summary judgment win and sent the case back to the lower federal court. There a district judge ruled in September 2022 that the franchisees can’t be employees because they don’t perform services for the convenience store chain, and 7-Eleven actually performs services for them.

The threshold question of service provision is meant to be a “simple, unidirectional inquiry” as to whether a worker “performs any services” for the employer, according to Massachusetts’ amicus brief. The district court’s September decision is a “significant departure” from the statutory text and would “fundamentally transform” the initial inquiry, saddling workers with a “much more onerous burden” of substantiating that they perform services before they’re presumed to be employees, the state said.

Ensuing Onslaught?

However the appellate court rules, the fallout may well be contained.

Many franchisees don’t want to be treated as employees because they like having the independence to run their business as they see fit, while using the franchisor’s trademarks and systems, Ann H. MacDonald, co-chair of ArentFox Schiff LLP’s franchise team, told Bloomberg Law.

Franchisors aren’t trying to skirt wage-and-hour laws, MacDonald, who has written about the Massachusetts Supreme Judicial Court’s opinion in the case, said. They just have a relationship with franchisees that is fundamentally different from the one that employers have with their employees, she added.

The main thing that the SJC made clear is that franchisees should be looked at like other workers, said Ruckelshaus, whose organization often litigates on behalf of low-wage workers. There “doesn’t have to be an onslaught of litigation” if the 7-Eleven franchisees win, and whether others are employees or contractors will always be fact-dependent, she added.

What companies call their workers isn’t supposed to matter, she said. Instead, what should matter is what those workers actually do.

DLA Piper LLP and Nelson Mullins Riley & Scarborough LLP represent 7-Eleven. Lichten & Liss-Riordan PC represents the franchisees. Attorney for 7-Eleven wasn’t able to comment on the case prior to publication.

The case is Patel v. 7-Eleven Inc., 1st Cir., No. 23-01043, oral arguments 7/26/23.