Are Franchisees Employees? California Court Says No

In October 2017, four franchisees filed a federal complaint against the global convenience store chain, 7-Eleven, seeking to represent a purported class of over 1,000 similarly situated 7-Eleven franchisees in California. The franchisees alleged 7-Eleven’s corporate entity violated the Fair Labor Standards Act, California Labor Code, California Code of Regulations, and California Business and Professions Code. The central issue in the case was whether 7-Eleven misclassified franchisees as independent contractors instead of employees.

The franchisees filed a motion to certify a collective class of all persons who were franchisees of a 7-Eleven store who were not paid as W2 employees.  While the motion for class certification was pending, 7-Eleven moved for judgment on the pleadings. On March 14, 2018, Judge Walter in the Central District of California granted 7-Eleven’s motion, finding the franchisees were not employees.

In determining that 7-Eleven properly classified the franchisees as independent contractors, the court applied the three-prong test outlined by the California Supreme Court in Martinez v. Combs: (1) whether the employer had the right to exercise control; (2) whether the employer suffered or permitted work; and (3) whether common law “engagement” theory applied. First, the court considered whether 7-Eleven had the right to exercise control over the wages, hours, or working. The franchisees argued that 7-Eleven (a) determines the amount and timing of the conditional payments paid to franchisees; (b) exercises control over the franchisees’ hours by requiring them to keep their stores open 24 hours and operate their stores 364 days per year (7-Eleven closes for 24-hours on Christmas); and (c) exerts extensive control over working conditions, including requiring stores be kept at a specific temperature, controlling payment of all wages, and instructing franchisees on pay practices, performance appraisals, and disciplinary actions such as terminations. The court did not find their arguments persuasive. Instead, it found 7-Eleven’s controls were designed to advance the company’s goal of maintaining “conformity to certain operational standards and details” from store to store. The court further noted that while the franchisees were mandated to keep their stores open 24/7, the franchisees themselves were not required to be present at any particular time.

Second, the court considered whether 7-Eleven “suffered or permitted” the franchisees to work, which would impose liability based on a defendant’s knowledge and subsequent failure to prevent the work from occurring. The court rejected the franchisees’ argument that 7-Eleven knowingly permits franchisees to perform work while being paid less than minimum wage because it requires franchisees to perform 300 hours of work without pay by completing initial training and directs franchisees to “use their best efforts to operate a convenience store up to 24 hours a day, 364 days a year.” The court reasoned that “a franchisee is often an entrepreneurial individual who is willing to invest his time and money, and to assume the risk of loss in order to own and profit from his own business,” training to “gain the knowledge and skills necessary to successfully operate their franchises.” The court further noted that requiring on-going training on an annual basis also “advances 7-Eleven’s goal of maintaining uniformity among stores, which helps build its brand and ultimately benefits all franchisees.”

In evaluating the last prong of the Martinez test, the court considered whether 7-Eleven “engaged” the franchisees, thereby creating a common law employment relationship. The court began by citing the common law definition that “the principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the desired result.” The court found that 7-Eleven did not control the manner and means of how the franchisees operated their stores. The court went further to state that even if 7-Eleven “control[led] virtually all goods and services sold in [the] stores, as well as how they are marketed, advertised, and displayed”; dictated “which vendors [franchisees] could use to purchase products”; “contractually command[ed] compliance with all of its standards and specifications for all products and services carried, used or offered for sale at the franchisees’ stores”; “contractually command[ed] what clothing employees may wear and how the workers must interact with customers”; and dictated “what type of worker [franchisees could] hire”, as alleged by the franchisees, those controls would still be insufficient to create an employment relationship because “all of [those] requirements are merely goods, presentation, and service designed to ensure operational uniformity among 7-Eleven branded stores.”

Ultimately, the court concluded that the franchisees’ allegations and the relevant terms of the franchise agreements showed that 7-Eleven’s controls did “not exceed what is necessary to protect 7-Eleven’s trademark, trade name and good will.” The court dismissed the complaint and found that 7-Eleven did not misclassify the franchisees as independent contractors.

Although this ruling represents a win for California franchisors, it is critical for franchisors to always consider the fine line between controlling the brand and controlling the manner and means of franchisees’ work.