BOSTON (CN) — The Massachusetts Supreme Court struggled on Monday with the implications for employment law while considering whether a group of 7-Eleven franchise owners should be paid like employees — including overtime and other benefits — rather than treated as independent contractors.
Several justices openly admitted being perplexed as to how to keep shady businesses from evading the wage laws by falsely treating employees as franchisees while at the same time not putting an undue burden on legitimate business operations.
“How do we do that?” asked Justice Scott Kafker. “Because I have no idea.”
A group of 7-Eleven franchisees filed a class action in 2017, complaining that many of them are glorified downtrodden store managers who “often find themselves working grueling hours for less than minimum wage.”
7-Eleven operates about 10% of its 7,800 U.S. stores itself and franchises the rest, but the plaintiffs claim that they’re indistinguishable from the manager-employees because 7-Eleven dictates every aspect of the relationship, including hours of operation, signage, uniforms, what goods are sold and where items must be placed in the stores. Even the store thermostats are controlled remotely by corporate headquarters.
7-Eleven is doing “an end-run around the wage laws,” the plaintiffs’ attorney Shannon Liss-Riordan told the court. She said other employers — including cleaning companies, trucking businesses and even strip clubs — have tried to pull a similar trick by treating employees as independent franchisees.
But 7-Eleven says the lawsuit is a cash grab by the franchisees who have “spun a Dickensian tale” but are in fact highly successful entrepreneurs with wide latitude in operating their businesses, including setting their own hours, hiring and firing staff and deciding whether to participate in promotions.
The case has a complex history. A federal court initially found that franchisees can never be employees, but on appeal the First Circuit certified the question to the Massachusetts Supreme Court, which disagreed. On remand, the federal court said that even if franchisees can theoretically be employees, under state law employees are people who “perform a service” for an employer, and the franchisees here didn’t perform any services. On appeal, the First Circuit once again seemed uncertain and certified the question to the state high court.
The U.S. Chamber of Commerce even weighed in on the case, arguing that a ruling in favor of the franchisees could turn all sorts of routine business deals into an employment relationship, including royalty agreements, percentage leases in commercial real estate and consignments of art and antiques.
“Forget about employment contracts. Doesn’t this cover every contract that’s ever been created in the history of mankind?” Kafker asked.
“Not everybody is an employer,” added Justice Dalila Wendlandt. “What franchise would pass your test?” she asked Liss-Riordan. “What is your test?”
Liss-Riordan said a worker “performs a service” if the business makes money from the worker’s labor. But Kafker wanted to know whether the wage law would encompass a franchise owner who makes $3 million a year from the business and works only three hours a week.
“The cleaning employees were being exploited,” Kafker said. “This is different … We’re doing something that has the potential to really warp the employment laws.”
Liss-Riordan responded that even corporate executives who make millions of dollars a year are still considered employees. “The problem is that ‘franchise’ brings up images of McDonald’s,” she said, but her clients aren’t wealthy McDonald’s owners but rather a “largely immigrant workforce” who are also being exploited.
“What if the franchisee is an LLC?” Wendlandt asked. “Who is the employee? … We need to write some sort of legal principle that limits this. How are not all workers employees of 7-Eleven?”
Kafker added, “This is almost incomprehensible. You define services in an incredibly broad way. I just don’t have a sense that this is the same thing, but I can’t quite put my finger on it.”
He told Liss-Riordan that if she wants a ruling that distinguishes 7-Eleven from McDonald’s, “you’re walking down a slippery slope.”
Arguing for the state attorney general, David Kravitz contended that a service is being performed if the revenue flowing to the business is dependent on the worker.
Pushing back, however, Kafker said, “I can’t follow what the AG is saying. Are there any limitations on this? You own the franchise, you make a lot of profits, you hire employees and you don’t do any work there … The wage act is an employment act, yes? You’re saying ‘services’ has nothing to do with employment? … That’s what I’m struggling with. You think the legislature’s intent is that owners who make money out of profits can also be employees?”
Kafker then asked 7-Eleven’s attorney, Norman Leon of DLA Piper in Chicago, “How do we define ‘services’ to distinguish the owner of a Hilton hotel and the cleaner who is tricked into being a franchisee?”
Leon said the difference is that cleaners, truckers and strippers are all providing services to the businesses’ own customers, whereas people who walk into a convenience store are customers of that store and not of 7-Eleven corporate headquarters.
But Liss-Riordan said that “performing a service” should be an easy-to-meet threshold inquiry and that separating Hilton owners and strippers should be done afterward based on a factual inquiry.
“If you put teeth into the threshold, it will be abused and misused,” she said.
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