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.
