In a widely-anticipated decision, the Massachusetts Supreme Judicial Court unanimously held that where a franchisee is an “individual performing any service” for a franchisor, the three prong test set forth in the independent contractor statute applies to the relationship between a franchisor and the individual and is not in conflict with the franchisor’s disclosure obligations prescribed by the FTC Franchise Rule.
The plaintiffs operate several 7-Eleven stores in Massachusetts pursuant to franchise agreements entered into with 7-Eleven. According to the franchise agreements, the plaintiffs were classified as independent contractors.
The franchise agreements required the plaintiffs to comply with certain requirements specific to 7-Eleven stores. Specifically, the stores were required to operate certain hours, stock particular inventory sold by 7-Eleven’s preferred vendors and employ the 7-Eleven payroll system. Additionally, in accordance with the franchise agreements, the plaintiffs did not receive a traditional salary. Instead, they drew their pay from the store’s profits after paying for various fees required by the franchise agreement.
The plaintiffs filed suit claiming that they were misclassified as independent contractors in violation of the independent contractor statute, as well as M. G. L. c. 149, §148 (wage act) and M. G. L. c. 151, §§ 1, 7 (minimum wage law) and that they should have instead been classified as 7-Eleven employees.
Massachusetts Independent Contractor Statute
The Massachusetts Independent Contractor Statute (ICS) “establishes a standard to determine whether an individual performing services for another shall be deemed an employee or an independent contractor for purposes of the wage statutes.” Somers v. Converged Access, Inc., 454 Mass. 582, 589 (2009). It provides a three-pronged “ABC” test to assess whether an individual is an employee or an independent contractor.
The ICS presumes that any person who performs services for an employer “shall be” considered “an employee” for the purposes of the wage statutes. M. G. L. c. 149, §148B. However, this presumption can be overcome by the putative employer if the following three prongs can be established:
(1) The individual is free from control and direction in performing services;
(2) The service performed is outside the putative employer’s usual course of business; 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.
See M. G. L. c. 149, § 148B.
Massachusetts courts have long recognized that the “legislative purpose behind the independent contractor statute is to protect employees from being deprived of the benefits enjoyed by employees through their misclassification as independent contractors.” Somers, supra at 592. When misclassification of employees as independent contractors occurs, it creates “an unfair competitive advantage over employers who correctly classify their employees and bear the concomitant financial burden. Id. at 593.
FTC Franchise Rule
The FTC Franchise Rule’s main concern is not the classification of workers as either employees, or independent contractors, but rather seeks to preclude misrepresentations related to the costs, terms and conditions, and operational requirements in purchasing and running a franchise business. It’s legislative purpose centers on the government’s desire to protect potential franchisees from being lured in by deceptive representations regarding potential income. 43 Fed. Reg. 59, 614, 59, 625 (1978). The FTC Franchise Rule requires certain disclosures to the potential franchisee before the sale takes place and prohibits the franchisor from making unilateral, material alterations to the franchise agreement without providing timely notice to the franchisee. See 16 C.F.R. §436.2, 436.9.
The disclosure requirements included within The FTC Franchise Rule apply to franchisors which included “any person who grants a franchise and participates in the franchise relationship.” 16 C.F.R. §436.1(k) A franchise is defined as, “a continuing commercial relationship where the franchisor 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 methods of operation.” 16 C.F.R. §436.1(h)(2). Therefore, the FTC Franchise Rule disclosures are required when:
- The franchisor exerts a significant degree of control over the franchisee’s methods of operation, or
- The franchisor provides significant assistance in the franchisee’s methods of operation.
The FTC Franchise Rule does not contemplate the implications of independent contractors versus employee status.
Do the Provisions of Massachusetts ICS Conflict With the FTC Franchise Rule as to Franchises?
The Court here found that the two laws are not in conflict because the legislative purpose and practical effect of each are different. The FTC Franchise Rule seeks to address and prevent potential franchisees from being duped into an unfavorable franchise agreement. It is concerned with certain “presale disclosures” being made to the franchisees. Compliance with the FTC Franchise Rule’s provisions does not require that a franchisor exercise any particular degree of control over the franchisee. Instead this regulation provides rules for when the franchisor chooses to exercise a certain degree of control over the franchisee’s methods of operation. Even when the franchisor does not exercise any control over the franchisee’s method of operation, the disclosure rules can still be triggered and must be adhered to by the franchisor if the franchisor “provides significant assistance in the franchisees method of operation.” 16 C.F.R. §436.1(h)(2).
Despite 7-Eleven’s reliance on the court’s prior decision in Monell v. Boston Pads, LLC, 471 Mass. 566, (2015), the Court here found that it was not persuasive because that case dealt with two statutes that were actually in conflict with one another. That was not the case here. The Court found that a franchisor can comply with the financial disclosures required by the FTC Franchise Rule and, at the same time, comply with its obligations under the ILS for situations in which a franchisee is deemed an employee. Moreover, the FTC Franchise Rule itself promotes the conclusion that both rules can coexist without a conflict in that it specifically states that “[t]he FTC does not intend to preempt the franchise practice laws of any state or local government, except to the extent of any inconsistency with [the FTC Franchise Rule] and that “a law is not inconsistent with [the FTC Franchise Rule] if it affords prospective franchisees equal or greater protection, such as registration of disclosure documents or more extensive disclosures.” 16 C.F.R. §436.10(b).
Furthermore, despite the contention that the exercise of “a significant degree of control over the franchisee’s method of operation” would render every franchisee an employee under the first prong of the ABC test, the Court found this to not be the case for the simple fact that the two tests are not the same. The two standards are not the same because “control over the franchisee’s method of operation” does not require a franchisor to “exercise control and direction in connection with the franchisee’s performing any service for the franchisor”, which would pertain to the first prong of the ABC test. The use of the word “control” in both the FTC Franchise Rule and the ICS does not mean that they are statutorily meant to apply to the same type of activity and does not inherently create a conflict between the two provisions. Indeed significant control over a franchisee’s method of operation and control and direction of an individual’s performance of services are not necessarily coextensive.” See Goro v. Flowers Foods, Inc., U.S. Dist. Ct., No. 17-CV-2580 TWR (JLB) (S.D. Cal. Sept. 21. 2012); see also Wickham v. Southland Corp., 168 Cal.App.3d 49 (1985).
The ICS does not seek to prohibit or regulate legal franchise relationships. Its purpose is to address any employment relationship, including franchises, in which the employer seeks to misclassify an employee for the purpose of avoiding extra costs and obligations under the law. If all concerned parties are following the letter of the law, the Court opined that franchises will not be impacted in a negative way by the application of the ICS. Therefore, the Court concluded that the independent contractor statute applies to the franchisor/franchisee relationship and is not in conflict with the franchisor’s disclosure obligations as set forth in the FTC Franchise Rule.