BOSTON (CN) — Franchise owners of 7-Eleven stores could be considered employees of the parent company and not independent contractors, in what is teed up to be a standard-setting decision by the First Circuit.
The nearly decade-old case — before the appellate court for the second time — is certainly important to the store managers, it but could also have a significant impact on Massachusetts state laws for independent contractors.
“These are very important policy decisions about Massachusetts law,” said Shannon Liss-Riordan of the firm Lichten & Liss-Riordan PC, representing the franchisees during oral arguments on Wednesday before the three-judge panel. “If this decision is allowed to stand, it will upend the enforcement of the independent contractor law throughout the economy.”
In the underlying class-action complaint, filed in 2017 in Massachusetts state court, a group of Boston-area-based 7-Eleven franchise owners claimed they were misclassified by 7-Eleven as independent contractors. As a result, they claimed, they had to pay for their own jobs and shell out their own money for expenses they would not have if they were treated as employees.
“These workers, whose services are the bedrock of 7-Eleven’s business, often find themselves working grueling hours for less than minimum wage,” the complaint alleged, noting the company nevertheless unfairly deducted employe payroll taxes and insurance despite considering the managers independent contractors.
In response, attorneys for the convenience store chain called the lawsuit a cash grab seeking to recoup damages triple the value of the stores’ operating expenses.
Last year a district court judge ruled in favor of 7-Eleven and dismissed the case, writing that because the franchisees did not provide any services to the company they had no standing under Massachusetts’ so-called “ABC” law to challenge the misclassification.
Under the ABC test, any individual performing a service constituted an employee except those who were free from control or direction, services that were “outside the usual course of the business,” and those who worked independently in the same trade or sector.
The Massachusetts Supreme Judicial Court was asked to hear the case and in a 2022 ruling noted the state’s ABC test did not conflict with a federal franchise rule that delineates independent contractors.
In their appeal of the dismissal, the franchisees argued the judge wrongfully ignored a 2022 Massachusetts high court ruling stating the ABC test must be used to determine whether the managers were employees.
“Without the franchisees to run the stores, 7-Eleven would have no revenue,” Liss-Riordan argued in the appeal.
Two issues dominated the oral arguments before the First Circuit on Wednesday: whether 7-Eleven technically paid franchise owners anything and whether the district court violated the state supreme court’s ruling.
Urging the circuit court to send the issue back to the Massachusetts high court, Liss-Riordan said 7-Eleven corporate controls the shared bank account with each franchisee, sets rules for the franchises and even tells franchisees that "we pay you" in its franchise agreement document.
“This is not like a typical franchise,” Liss-Riordan argued.
However at least one of the judges was unpersuaded at the outset.
“This looks like, what from I can tell from the papers, it looks like a genuine franchise,” said Judge Bruce Selya, a long-time member of the circuit originally appointed by Ronald Reagan, adding he didn’t see anything indicating the franchise agreement was a sham or manipulative. “To say that running the store is a service to 7-Eleven is something I’m having trouble getting my brain around.”
The dispute also garnered the attention of the state government, which sided with the franchise owners in an amicus brief.
“The issue that the case presents is extremely significant,” attorney David Kravitz, who represented Massachusetts, told the circuit court, adding that the First Circuit could simply reverse the district court’s ruling.
Lawyers for 7-Eleven said the district court was right to dismiss the case and argued that designating any worker who provides services as an employee would be an over-broad view of the ABC test.
In that case, argued Normal Leon of DLA Piper, case cab drivers who paid medallion owners for the right to use a medallion would be an employee, as would volunteers of Habitat for Humanity.
Judge O. Rogeriee Thompson, an Obama appointee, pushed back on that point, though.
“Obviously you have managers who run stores for 7-Eleven who get paid,” she said. “This is a much more complicated organizational structure, but it doesn’t mean that the way it’s set up isn’t also running the store.”
Leon asked the court to “follow the money” in the franchise agreements, adding that franchisee bank accounts are held in accounts: “7-Eleven doesn’t pay its franchisees anything,” he said. “Franchisees pay 7-Eleven for providing services.”
7-Eleven operates more than 8,000 convenience stores across the country, with nearly 170 in Massachusetts. Only 10% of those stores are owned and operated by 7-Eleven itself, with the remainder managed by franchisees, though managers claim the company dictates nearly every aspect and detail of how to run the stores. Managers receive a percentage of the store revenue but can withdraw funds only with permission from 7-Eleven corporate.
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