Federal Court in Massachusetts Holds “ABC Test” is Inapplicable to Franchise Model

By Kristen M. Smith

The past year has yielded a series of events impacting employee vs. independent contractor classification and joint employer considerations. Specifically, California Assembly Bill 5 (“CA-AB 5”) went into effect in January (establishing a 3 part “ABC Test” to determine whether a worker is an employee or independent contractor), the U.S. Department of Labor issued a new joint employer rule in January (requiring application of a 4 part test to determine if an employee of one company is jointly employed by another company) and most recently, California has passed Proposition 22 (which exempts “gig companies” from many requirements of CA-AB 5).

Of course, independent contractor status is a touchstone of the franchise model. These recent developments provide more questions than answers as to how the franchise model may be impacted. What hangs in the balance is the possible application of the ABC Test to the franchise relationship to determine whether or not franchisees are technically employees rather than independent contractors. This fear is stoked by a 2019 Ninth Circuit decision, Vazquez v. Jan-pro Franchising, in which the court left open as a possibility that the ABC Test should be applied to determine whether franchisees are employees and whether franchisors are joint employers of their franchisee’s employees.

With all of that background having set the stage, the franchise community waits to see how state legislatures and courts throughout the nation will react. As states often consider the positions of their fellow state’s courts, keeping an eye on developing case law in this arena is key for predicting what may be coming next.

So far, there are few developments that provide guidance. One recent decision from a federal court in Massachusetts, however, provides the latest insight on how courts may address the unanswered question of where franchising fits into this developing body of law.

In the case at hand, Patel v. 7-Eleven, Inc., a group of franchisees filed a lawsuit against 7-Eleven, claiming the franchisor had misclassified them as independent contractors rather than employees. The District of Massachusetts federal court applied the ABC Test. In doing so, the court examined the conflict between the ABC Test and the FTC Franchise Rule. If all three prongs of the ABC Test are satisfied, a worker will be classified as an independent contractor. One prong of the ABC Test is that the worker is free from the control or direction of the company. However, the FTC Franchise Rule includes in the definition of “franchise” that the franchisor will exert a significant degree of control over the franchisee’s method of operation. A strict application of the ABC test would effectively classify all franchisees as their franchisor’s employees. The court in Patel determined that such a result would be nonsensical in that it would “eviscerate the business franchise model, rendering those who are regulated by the FTC Franchise Rule criminally liable for failing to classify their franchisees as employees.” In line with this determination, the court granted summary judgment in favor of 7-Eleven.

While we continue to wait to see how this complicated body of law will develop, the Patel decision in Massachusetts is hopefully an indicator of the path courts will take moving forward. We will continue to monitor and analyze developments that impact independent contractor and joint employer determinations. Please contact us with any specific questions about how the current state of the law in this area may affect your business.