SJC says franchises must comply with independent contractor law
Chains like 7-Eleven will have to review their agreements
THE SUPREME JUDICIAL COURT ruled Thursday that companies operating as franchises need to comply with the state’s independent contractor law, a ruling that could lead companies to newly scrutinize the terms of their arrangements with franchisees.
Many large chains operating in Massachusetts, like Dunkin’ Donuts and McDonald’s, are franchises, which means individual franchisees own the stores, but they pay franchise fees to the parent company and are required to use its business model.
In the SJC case, Dhananjay Patel vs. 7-Eleven, five 7-Eleven franchise owners sued 7-Eleven, arguing that they were being treated like employees, not independent business owners, because of the amount of control the corporate 7-Eleven had over their operations and finances. If they were considered employees, 7-Eleven would be responsible for paying costs like overtime pay and unemployment insurance, and the company might not be able to demand franchise fees out of the franchisees’ wages.
“I do think this is a warning call to corporate franchisors about what their relationship is with their franchisees,” said Shannon Liss-Riordan, an attorney representing the franchisees in this case. “In order for franchisees to be independent contractors, they really need to be free to run their own business and need to be independently running their own business and calling the shots.”
The case was initially dismissed by a US District Court judge, who ruled that the independent contractor law did not apply to franchisees. The plaintiffs appealed, and the SJC took the case in order to clarify whether the independent contractor law would apply. The SJC did not rule on the status of the 7-Eleven franchisees. That question will go back to the federal judge to consider, based on facts specific to their agreement with 7-Eleven. But the unanimous SJC ruling, written by Justice Dalila Wendlandt, provides a new framework that the judge will have to consider by establishing that Massachusetts’ independent contractor law applies to franchisees.
Matthew Iverson, an attorney representing 7-Eleven, declined to comment.
Ryan Kearney, general counsel for the Retailers Association of Massachusetts, which submitted a court brief supporting 7-Eleven, said he is disappointed in the decision, which will result in each franchise examining their agreements on a case-by-case basis.
The ruling could have “a chilling effect,” Kearney said. “If every franchise has to revisit their agreement or live in fear they may be in violation of this law, there’s going to be an economic opportunity impact there.”
Massachusetts uses a three-part standard, known as the “ABC test,” to determines whether a person is an employee or an independent contractor. An employer who wants to treat someone as an independent contractor has to show that the work is done without the control and direction of the employer; outside the usual course of the employer’s business; and by someone who has their own business doing that type of work.
Historically, employers, particularly in industries like construction, have tried to misclassify workers as independent contractors to avoid paying certain benefits like overtime pay. The Massachusetts law is aimed at eliminating misclassification.
Representatives of businesses that operate through franchises had argued before the court that they operate a distinct business model that is not subject to the independent contractor law. They said a federal law governing franchises preempts the state independent contractor law and contradicts it.
“Categorically excluding franchise relationships from the statute’s ambit would permit employers to evade obligations under the wage statutes merely by labeling what is actually an employment relationship as a ‘franchise’ relationship, allowing employers to foil the legislative intent to protect workers as employees when they are, in fact, employees,” the court wrote.
The court held that the federal law is primarily intended to govern what disclosures are required before someone enters into a franchise relationship, and it is possible to comply with both the federal and state laws.
While 7-Eleven and other business organizations warned that a decision against them would decimate the franchise industry in Massachusetts, the court pushed back against that assertion. “Despite 7-Eleven’s dire predictions that application of the ABC test to franchise relationships will end franchising in the Commonwealth, other courts have done so apparently without the predicted apocalyptic end of franchise arrangements in their respective jurisdictions,” the court wrote.
The justices noted that nothing in the law “prohibits legitimate franchise relationships among independent entities that are not created to evade employment obligations under the wage statutes.” Distinguishing between legitimate franchises and those created to evade wage laws, they said, will depend on the facts of each case.
The SJC decision comes amid the backdrop of a ballot question sponsored by Uber and Lyft, which would make it easier for ride-hailing companies to classify their drivers as independent contractors. Attorney General Maura Healey has sued the companies, arguing that the drivers should be considered employees.
Liss-Riordan, who is running for attorney general and opposes the ballot question, said the franchise decision is a reminder about the importance of state wage laws. “We shouldn’t tolerate broad carveouts that corporations are seeking to save on labor costs and pad their bottom lines,” she said.Kearney, whose organization supports classifying ride-hailing drivers as independent contractors, countered that the case illustrates the lack of certainty surrounding applications of the independent contractor law, which is one of the broadest independent contractor laws in the country. He believes the Legislature should revisit the law. “We’re concerned that a lack of certainty in laws negatively impacts the ability to engage in economic activity,” Kearney said.