Key Takeaways:
- The Massachusetts Supreme Judicial Court clarified that 7-Eleven franchisees are not the company's employees under the Massachusetts independent contractor statute.
- According to the Court, the plaintiff-franchisees were engaged in a business-to-business relationship with 7-Eleven where they paid for the use of the 7-Eleven business format and, thus, were not "individual[s] performing any service" for the franchisor under the independent contractor statute.
- The Patel decision provides long-awaited clarity as to whether franchisees like the 7-Eleven franchisees could be deemed independent contractors under Massachusetts' strict independent contractor statute.
On September 5, 2024, the Massachusetts Supreme Judicial Court
("SJC") ruled in Patel v. 7-Eleven that 7-Eleven
franchisees are not employees of the franchisor under the
independent contractor statute. The SJC looked beyond the labels in
the parties' contract and weighed the facts of the
plaintiff-franchisee's relationship to the franchisor,
7-Eleven, and concluded that the plaintiffs did not "perform[]
any service" for 7-Eleven. As such, the plaintiffs were not,
and could not be, employees under the statute.
The Massachusetts independent contractor statute, Mass. Gen. Laws.
Ch. 149 § 148B states that an "individual performing any
service" for an alleged employer is an "employee"
unless the alleged employer rebuts this presumption by establishing
the three-prong "ABC test" set forth in the statute. This
distinction is crucial because employees receive greater legal
protections under Massachusetts wage and hour laws, such as minimum
wage and overtime pay. The plaintiffs in Patel own and
operate convenience stores, and each entered into a franchise
agreement with 7-Eleven that they argued misclassified them as
independent contractors. In 2022, in an attempt to determine if the
five plaintiff-franchisees were misclassified by 7-Eleven, the SJC answered a certified question from the First
Circuit and held that the state's three-pronged "ABC
test" for independent contractor status applied to
franchisor-franchisee relationships if the franchisee was an
individual performing services for a franchisor. The court noted
that the "ABC test" is fact-sensitive and declined to
apply the test to the facts in Patel. The case again
returned to the SJC when the First Circuit certified to it another question – whether the plaintiffs
"perform any service" for 7-Eleven within the meaning of
the independent contractor statute where they perform various
contractual obligations under a franchisee agreement and 7-Eleven
receives a percentage of the franchise's gross profits.
In the September 5, 2024 ruling, the SJC ruled the plaintiffs do
not "perform any service" for 7-Eleven but rather operate
the independent stores for themselves. The court found the
relationship between the plaintiffs and 7-Eleven is a
business-to-business relationship in which the franchisees chose to
operate their businesses using the 7-Eleven business format
franchise, to pay 7-Eleven for that use, and to abide by the terms
of their franchise agreement. According to the SJC, the purpose of
the independent contractor statute is to protect employees working
for a company when the circumstances indicate that they are, in
fact, employees, but none of the facts in Patel indicate
that the plaintiffs are employees.
The case will return to federal court for further proceedings. But
the SJC's ruling resolves the open question from the 2022
ruling as to how the "ABC test" would apply to the facts
in Patel. Although franchisees could be considered
independent contractors, the Patel decision provides
guidance on how franchises can structure their
franchisor-franchisee relationships to avoid the reach of the
independent contractor statute. Given Massachusetts's steep
penalties for Wage Act violations, franchisors and franchisees
should review their business relationships to ensure they are
structured in accordance with the Patel decision to avoid
potential application of the independent contractor statute.
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