On March 24, 2022, in the case of Patel v. 7-Eleven, Inc. (No. SJC-13166), the Supreme Judicial Court (SJC), the highest court in the Commonwealth of Massachusetts, ruled that whether a franchisee is an independent contractor or an employee for purposes of Massachusetts wage statutes will be resolved using the three-prong test set forth in the Massachusetts Independent Contractor Law (ICL).

The statute can be found here. The opinion can be read here.

Background 

In setting up the discussion in Patel, the SJC described the ICL as establishing “a standard to determine whether an individual performing services for another shall be deemed an employee or an independent contractor for purposes of [Massachusetts] wage statutes.” The ICL “sets forth a presumption that ‘an individual performing any service’ for a putative employer ‘shall be" considered an ‘employee’ for purposes of the wage statutes.” Once the individual has shown the performance of services for the putative employer, the alleged employer may rebut the presumption by establishing each of the following three prongs:

1. the individual is free from control and direction in connection with performing the service, both under his contract for the performance of service and in fact; and

2. the service is performed outside the usual course of the business of the employer; and

3. the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.

Generally speaking, application of the prongs can vary depending on the circumstances and the nature of the alleged employer’s business. In non-franchise cases, prongs one and three may be relatively straightforward for an alleged employer to satisfy, while the second prong may be less so. That may be because, in non-franchise cases, if the putative employee is providing services within the “usual course of the business of the employer,” they will be classified as an employee even if prongs one and three are met.

In Patel, the plaintiffs were franchisees of the 7-Eleven convenience store chain and own several stores in Massachusetts. The franchise agreements classified the plaintiffs as independent contractors who did not receive a salary from the franchisor, but rather paid themselves out of their store’s profits.

The plaintiffs filed a class-action lawsuit in the Massachusetts Superior Court alleging that 7-Eleven, Inc. misclassified them as independent contractors rather than as employees, in violation of several Massachusetts wage laws such as the ICL, the Wage Act, and the Minimum Wage Law. The case was removed to the United States District Court for Massachusetts. The District Court denied the franchisees’ motion to certify their class and, on cross-motions for summary judgment, granted summary judgment to 7-Eleven, Inc. Relying on a 2015 SJC decision, the District Court concluded that there was an “inherent conflict” between the ICL and the FTC Franchise Rule and held that the ICL does not apply to franchisee-franchisor relationships. The franchisees appealed.

The First Circuit Court of Appeals determined that the outcome of the appeal hinged on a question of Massachusetts law, but the Massachusetts courts had never taken up the issue. On August 9, 2021, the First Circuit certified to the SJC the question whether the ICL applied to a franchisor that was required to comply with the FTC Franchise Rule.

Holding

After summarizing the ICL and the FTC Franchise Rule, the SJC concluded that, where a franchisee is an individual performing any service for a franchisor, the ICL will apply to the relationship to determine independent contractor status for purposes of Massachusetts wage statutes. The SJC also held that application of the ICL for purposes of wage statutes is not in conflict with the FTC Franchise Rule, reasoning that a franchisor, if necessary, could comply with both the state wage law and any disclosure obligations under the FTC Franchise Rule.

The SJC was careful to note that the application of the ICL test did not mean that franchisees would necessarily be classified as employees for purposes of the Massachusetts wage statutes. In particular, the Court noted that franchisors had met all three prongs of the ABC test in other cases and expressed no opinion as to how the ABC test would apply to the facts in Patel.

Given the holding, the case will now go back to the First Circuit for further analysis of whether the Patel plaintiffs are employees for purposes of Massachusetts wage statutes under the facts in this case.

Takeaways

The application of various state wage statutes to different business structures continues to be an evolving issue. Accordingly, it is important to remember that misclassifying workers as independent contractors or intentionally seeking to avoid applicable wage laws in Massachusetts may result in criminal enforcement or civil penalties, including debarment from public works contracts.