On March 24, 2022, the Massachusetts Supreme Judicial Court (“SJC”) issued its highly anticipated ruling on a certified question in Patel v. 7-Eleven, Inc. (Docket No. 20-1999).
On December 13, 2021, we wrote about looming implications for franchisors as the federal trial court’s concern focused on a perceived conflict in two laws: first, the Massachusetts Independent Contractor law (“MICL”) which requires an alleged employer who is accused of misclassification to prove, among other things, that the individual asserting the employment relationship “is free from control and direction with the performance of the service, both under his contract for the performance of service and in fact.” See M.G.L. c. 149, Section 148B(a)(1). An alleged employer’s inability to prove that alone will render the contractor an employee. Yet, the Federal Trade Commission defines a franchisor as one who “will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation[.]” See 16 C.F.R. § 436.1(h)(2).
7-Eleven argued that these laws are inconsistent and one cannot be a franchisor without exerting control over franchisees such that franchisees will necessarily be deemed employees under the MICL. That argument convinced the federal trial court to grant summary judgment for 7-Eleven under the theory that the MICL should not be applied to a franchisor at all. On appeal to the First Circuit Court of Appeals, the certified question issued as to whether these laws could be reconciled.
On March 24, 2022, the SJC rejected 7-Eleven’s argument that these two laws could not be reconciled. The SJC relied heavily on time-honored principles of statutory construction, hesitating to read statutes in conflict where the legislature was silent on the matter, and where they could be read harmoniously. And that’s what the SJC did: it read the statutes harmoniously, and in so doing, it offered franchisors substantial guidance.
For one thing, the SJC analyzed that just because a franchisor will have control over the franchisee’s “methods of operation,” this did not mean it will have “control and direction” over the franchisee’s “services performed.” This is significant because it signals that for a franchisor to simply have, for example, an Operations Manual, software to use, procedures to follow, or colors, logos and uniforms for employees to wear, this does not mean it is controlling “services.” Thus, trial or appellate courts that might have considered those factors important to determine if there was misclassification should re-consider them to be of no probable value to the misclassification argument. In fact, in its ruling in Patel, the SJC cites two California decisions that properly conducted such an analysis. Cf. Goro vs. Flowers Foods, Inc., U.S. Dist. Ct., No. 17-CV-2580 TWR (JLB) (S.D. Cal. Sept. 21, 2021) (“For example, the phrase ‘method of operation’ in the FTC Franchise Rule is broader than the phrase ‘performance of . . . [services]’ appearing in the ABC Test. While a franchisor may dictate that a franchisee include certain food items on its menu, that does not mean that a franchisor must dictate the franchisee’s hiring decisions, the layout of its kitchen, or the wages it pays its employees”); Wickham v. Southland Corp., 168 Cal. App. 3d 49, 54 (1985) (franchisor’s exercise of significant control over business operations not equivalent to control over franchisee’s performance of services where franchisee hired and fired, set wages for and instructed employees, and controlled day-to-day store operations).
The SJC’s focus on the word “service” and whether the franchisor is controlling that “service” is also significant because, to the SJC, that “service” is represented by such things as hiring decisions and wages paid. Thus, a franchisor who does not partake in a franchisee’s hiring decisions or interfere with decisions on wages to pay a franchisee or its employees should be plainly found to not be controlling the “services” being provided. In fact, this confirms that a franchisor — particularly a third tier master franchisor, such as existed in the SJC’s landmark decision in Depianti v. Jan-Pro Franchising International, Inc., 465 Mass. 607 (2013) who plays no role in “hiring” or “setting wages” — can readily prove a “lack of control” under this part of the MICL. The SJC again cited a California precedent in this analysis, and actually, two other 7-Eleven decisions from California and New Jersey, to further demonstrate the validity of its analysis: citing, Haitayan vs. 7-Eleven, Inc., U.S. Dist. Ct., Nos. 17-7454 DSF (ASx), 18-5465 DSF (ASx) (C.D. Cal. Sept. 8, 2021) (applying common-law right to control test, akin to first prong of ABC test, and finding franchisees were not employees where franchisees controlled “when they work, how much they work, and when they take vacations,” employed multiple individuals, and exercised control over “the hiring, firing, wages, discipline, scheduling and staffing of their employees”); 7-Eleven, Inc. vs. Sodhi, U.S. Dist. Ct., No. 13-3715 (MAS) (JS) (D.N.J. May 31, 2016) (franchisee was not employee under Fair Labor Standards Act’s definition of “employee,” which includes analysis of right to control similar to first prong of ABC test, where, inter alia, franchisee did not have regular schedule, wore specified uniform only sporadically, traveled around country on business unrelated to franchisor, was “hands off” in his management of convenient store, had other business ventures, and set store prices).
In Patel, the SJC also took the time to put to rest another misunderstanding when it comes to analyzing whether a franchisor has misclassified a franchisee. As background, all franchisors receive an “economic benefit” from franchisees. That, of course, is inherent in the franchise relationship (and, in fact, is ubiquitous in relationships where there is a licensing or sublicensing of a trademark, such as in franchising). Franchisees arguing misclassification have tried to argue that, because their work benefits the franchisor economically, they are akin to employees. Mercifully, the SJC made clear in Patel to point out that “performing service” for the franchisor “is not satisfied merely because a relationship between the parties benefits their mutual economic interests.” This point by the SJC will, we hope, put the franchisees’ argument about this economic benefit franchisors receive from their work to rest.
Significantly, for its further analysis in Patel, the SJC further cited a critical ruling in Georgia for Jan-Pro Franchising itself whereby this third tier master franchisor did prove not just that it did not control the franchisee at issue, but all other subparts of the MICL itself. The SJC citation to this Georgia ruling, Jan-Pro Franchising Int’l, Inc. v. Depianti, 310 Ga. App. 265, 267-268 (2011), has an incredible significance that cannot be understated and of which many may not be aware. That ruling issued in 2011, and since it came out, there have been a number of other court challenges across the country alleging franchisee misclassification. Many on the plaintiffs’ side have tried to marginalize this ruling in Georgia and have misinterpreted it to somehow have been a ruling that the SJC itself would not have supported. That argument has even gained traction before certain courts; now, however, the SJC has clearly stated that any effort to make the argument that this Georgia ruling is not good law under the MICL is a plain misunderstanding. The SJC has now clearly validated the Georgia ruling in favor of Jan-Pro Franchising International recognizing that Jan-Pro Franchising International successfully argued on the facts at-issue in that case that it had satisfied the MICL (and yes, the Georgia court was applying Massachusetts law in that case). Stated differently, Jan-Pro Franchising International readily satisfied each subpart of the MICL, and what is commonly called the A-B-C test for misclassification, and the SJC has now cited that ruling with approval to support its analysis in Patel. There can be no further debate that the SJC would recognize the Georgia ruling under the MICL as good law.
Finally, in Patel, the SJC even took the time to offer guidance on another matter: it validated the requirement of law that franchisors must charge franchisees a fee in order for franchisees to buy into the system. The SJC validated this component of franchising and pointed out how this fee is legitimate, even in a misclassification scenario. That is, it can be analyzed as different than allegedly “stealing wages” or “buying a job.” As the SJC pointed out, as long as the franchise fee does not impair any supposed misclassified franchisee’s right to the minimum wage and other wages, it can be found legitimate.
Now that that the SJC has ruled in Patel, we recognize that it may not be the ruling for which franchisors had most hoped. Many franchisors would understandably have hoped that the SJC would rule that the independent contractor laws could not apply to franchisors at all. Still, the SJC’s ruling in Patel is a ruling that provides substantial guidance to courts as to what is (and what is not) the type of franchisor activity that can legitimate co-exist against the factors that prove an independent contractor relationship.
For questions about this matter, please reach out to Jeffrey Rosin, firstname.lastname@example.org or any member of the O’Hagan Meyer team.
Authored by: Jeffrey Rosin