Franchisor 101: A Convenient Truth

Lewitt Hackman

In 2017, four former franchisees brought a class action in California, claiming 7-Eleven owed them unreimbursed expenses. The ex-franchisees claimed they were employees, not independent contractors of 7-Eleven. The court ruled the franchisees were properly classified as independent contractors and were not employees under California law.

Several pretrial rulings set the stage for the outcome. The court ruled the “Borello” test – not the more stringent “ABC” test – applied to the franchisees’ claims and that the franchisees could bring the claims only on an individual, non-class basis.

The test of an employment relationship under Borello is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired. The court acknowledged that analyzing if someone is an independent contractor in the franchising context is unique, because franchising is governed by state and federal regulations. These laws define a franchise to mean a relationship where the franchisor has authority to exert a significant degree of control over the franchisee’s method of operation or provide significant assistance. Because the right of control is part of the definition of a franchise, the court noted cases which held that qualifying a relationship as a franchise under federal and state law does not by itself make the franchisee an employee.

Applying the Borello test, the district court found evidence that the former franchisees exercised their own judgment in determining organization of the retail store; what products they would carry and pricing; what promotions to adopt; hiring, firing and setting hours of workers; and how to compensate themselves. The court observed that the former franchisees held themselves out as business owners on their tax returns and their success was directly tied to their business acumen. The court was persuaded that the former franchisees decided for themselves when to work, how often they worked and how much vacation to take.

The decision does not involve the infamous California “ABC” test but applies the less stringent Borello test for determining independent contractor status. The district court pointed out how the facts of this case differed from cases of commercial cleaning franchisees, wherein franchisees have been found to be employees of franchisors.

Established “brick and mortar” franchise companies like 7-Eleven ‎can win misclassification claims when the legal standard focuses on franchisee decision-making. While 7-Eleven was not subject to the “ABC” test, franchisors facing similar claims can consult with counsel on pointing to mandates of franchise regulation and distinguishing the degree of control that creates an employment relationship from control that is required by law such as the FTC Franchise Rule and the Lanham Act.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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