SJC case could upend franchise laws

QUESTIONS ABOUT how to classify workers have been lingering for years over industries as diverse as ride-hailing and construction. Now, add franchise convenience stores to the list. 

The Supreme Judicial Court will hear arguments Wednesday in a case that could upend the way state labor laws apply to franchise business owners.  

Franchises are a big part of the economy. In addition to 7-Eleven, many of the biggest chains operating in Massachusetts – Dunkin’ Donuts, McDonald’s, Burger King, and Subway – operate in a franchise model. Individual franchisees own the stores, but pay franchise fees to the company and are required to use its business model and operating procedures.  

The core of the case, Dhananjay Patel vs. 7-Eleven, which was filed by five 7-Eleven franchise owners, is whether the Massachusetts law that distinguishes between an independent contractor and an employee applies to franchisees. 

“They work long hours, they are paying for the privilege of managing 7-Eleven stores, they’re required to pay all the expenses of running a business,” Liss-Riordan said. “What they’re doing is no different than store managers. They manage the stores and work as clerks behind the counter.” 

While Liss-Riordan says she is focused on the specific circumstances of franchisees at 7-Eleven, franchising companies say the case could have broad implications. The companies warn that a decision that opens up franchisees to being considered employees could devastate their business model. 

“There’s going to be a huge chilling effect on the ability to franchise in Massachusetts,” said Ryan Kearney, general counsel for the Retailers Association of Massachusetts, which submitted a court brief supporting 7-Eleven. 

The International Franchise Association says businesses as diverse as restaurants, hotels, automotive service centers, gyms, hair salons, and landscaping businesses could become reluctant to expand in Massachusetts if the independent contractor law applied to them. 

Attorney General Maura Healey has sided with the franchisees, while several large business groups are supporting 7-Eleven. 

Under Massachusetts law, there is a three-part test, called the “ABC” test, that determines whether someone is an independent contractor or an employee. The plaintiffs say the test, which limits the amount of control an employer can maintain over an independent contractor, should apply to franchises. The plaintiffs believe they should be considered employees of 7-Eleven.  

Liss-Riordan wrote in her brief that 7-Eleven controls the stores’ finances and accounting, even maintaining each store’s bank accounts. Franchisees must abide by a 1,009-page operations manual, with strict oversight. 

The practical ramifications of applying the independent contractor law to franchises are significant. If a franchisee is an employee, it could be illegal for them to have to pay franchise fees out of their wages, which the plaintiffs argue is equivalent to paying for a job. It would make the parent company subject to state wage and hour laws – including paying overtime, offering sick leave, and paying for unemployment insurance for the franchisee and their employees. Today, the franchise owners operate as independent businesspeople and are responsible for payroll and other employer costs.  

7-Eleven argues, and a US District Court judge agreed, that the ABC test does not apply to the franchise relationship, since the test conflicts with a federal rule governing franchises. The federal rule defines a franchisor as a company that exercises control over its franchisees, while the independent contracting law requires a contractor to be free from control.  

7-Eleven warns in its court brief that if a franchisor cannot charge fees, the entire franchising model would fall apart. The company says the franchise owners who sued are operating multi-million-dollar businesses and trying to use the state’s independent contractor law as “a tool by which legitimate business owners can claim they are employees who are entitled to recover as ‘damages’ the millions of dollars they spent operating their businesses.” 

An attorney for 7-Eleven declined to comment. 

The Federal Trade Commission submitted a brief clarifying that the franchise rule was intended to govern disclosures and does not conflict with Massachusetts’ independent contractor law – though it did not take a position on how franchisees should be classified under Massachusetts law. 

After the plaintiffs lost in US District Court and appealed, the US Appeals Court asked the Supreme Judicial Court to weigh in because the question involves an interpretation of state law. 

Liss-Riordan is no novice to these issues, having built her career around challenging industries on workers’ rights issues, especially employee misclassification. She represented ride-sharing drivers from Uber and Lyft, arguing that they should be considered employees, not independent contractors. She won a major ruling against Starbucks, forcing it to change its tip-sharing policies. She is rumored to be considering a run for attorney general, should Healey not run for reelection. 

Healey submitted a brief in favor of the plaintiffs, arguing that to say the independent contractor law does not apply to franchisees “would only aid unscrupulous employers’ efforts to avoid their obligations” by misclassifying workers. “That result would deprive countless employees of the immediate benefits of wage and hour protections,” Healey wrote. 

A coalition representing immigrant worker groups and an association of employment lawyers also filed a brief supporting the plaintiffs. They note that non-traditional work arrangements are the fastest growing sector of jobs in America, and laws need to ensure employers are held accountable for paying appropriate wages. “The Wage Act applies to evaluate all work arrangements in the Commonwealth. To hold otherwise would ignore the intent of the Legislature and weaken employment rights,” attorneys for the groups wrote. 

Business organizations, including the US Chamber of Commerce, the National Federation of Independent Business, the Retailers Association of Massachusetts, the International Franchise Association, and Dunkin’ Brands are supporting 7-Eleven.  

Attorneys for the US Chamber of Commerce and the National Federal of Independent Business argue that one of the benefits of a franchise model is franchisees have ownership over their business. They wrote in their brief that a decision in favor of the franchisees “would ensure the decimation of the franchise model in Massachusetts, to the detriment of the state economy and the many thousands of small business owners operating franchises.”   

Jeff Hanscom, vice president for government relations at the International Franchise Association, said if an independent business owner suddenly becomes an employee of a brand, the relationship is no longer a franchise. “The local independent business owners become some form of corporate middle manager to a corporate store,” Hanscom said. Hanscom said the franchise model is unique, and trying to fit the independent contractor law into that model is like putting “a round peg in a square hole.” 

Hanscom said the practical ramification of a ruling against the industry remains uncertain, but many brands may not renew their agreements with state franchises. “Dunkin’ isn’t in a position to be deemed an employer of every Dunkin’ employee in Massachusetts,” Hanscom said. 

Similar litigation is ongoing in California, which has an independent contractor law similar to the one in Massachusetts. A US Appeals Court there ruled that its independent contractor law does apply to franchises.