Not as Easy as ABC-123: 7-Eleven Franchisees Are Not Employees of Franchisor

By Kent Franchise Law Group

Earlier this month, a federal judge in California decided that certain 7-Eleven franchisees were not employees of the franchisor.

The United States District Court for the Central District of California issued findings of fact and conclusions of law on September 8, 2021, which included a determination that, based mostly on the franchisees’ own level of control over their respective franchised businesses, the franchisees were not employees of the franchisor. Haitayan v. 7-Eleven, Inc., 2:17-cv-07454 (C.D. Cal. Sept. 8, 2021).

But, before any franchisor gets too excited, neither the ABC test nor California’s AB5 were used to make this determination. In an earlier order for this same case (dated February 8, 2021), the court had already ruled that the control test from Borello applied.  Further, in civil minutes for the case dated March 14, 2018, the court acknowledged that the upcoming ruling in Dynamex would help in determining the proper test, but there had not yet been a decision in that case at the time.

When the case was originally filed in 2017, the issues involved an expense reimbursement under a certain California Labor Code section that used the Borello test. In 2021, California courts no longer use this test to determine the status of a worker as an independent contractor, unless the case involves certain exceptions. You can read an explanation of how and when to apply the ABC test here: https://www.labor.ca.gov/employmentstatus/abctest/. 

Instead of using the ABC test, the court in Haitayan used the Borello test, which requires the court to look at whether the employer has the right to control the manner and means of accomplishing the result desired. S. G. Borello & Sons, Inc. v. Dep’t of Indus. Rels., 48 Cal. 3d 341, 350 (1989) (quoting Tieberg v.Unemployment Ins. App. Bd., 2 Cal. 3d 943, 946 (1970)).  In addition, the Borello test also considers the following factors: (a) whether the services are from a distinct occupation or business; (b) the kind of occupation; (c) the skill required; (d) which party supplies the instrumentalities, tools, and the place of work; (e) the length of time; (f) method of payment; (g) whether the work is a part of the regular business of the employer; and (h) whether or not the parties believe they are creating the relationship of employer-employee.  Id. at 351.

Ultimately, the court decided that, despite guidelines, training, specifications and field supervisors provided by the franchisor, the franchisees had “extensive control” over their own hours and businesses and, as such, were not employees of the franchisor. Haitayan at 19. For example, the franchisees each had total control over when they worked, when they took vacation, and how much they worked. Id. Also, despite the guidelines provided by the franchisor, the franchisees had control over the hiring and firing of their own employees, which products to carry, and pricing. Id. at 21.

In addition to the day-to-day control over the businesses, another persuasive argument derived from franchisor’s inability to terminate the franchisee without good cause. Id. at 23. Specifically, the California Franchise Relations Act prevents a franchisor from terminating the franchise agreement without good cause. See Cal. Bus. & Prof. Code §§ 20020-20021. And, in most cases, the franchisee would have the right to cure the default before being terminated. Accordingly, the court determined that the franchisor-franchisee relationship did not seem to create an at-will relationship.

Despite not using the test that will likely be used in future cases, the determination that a franchisor that provides specific guidelines for products, product placement, pricing, training and even sends field consultants to franchised businesses to determine whether the franchisee meets such guideless does not rise to the level of control of an employer. This should provide some level of comfort for franchisors.

Please check back on our blog for updates on the employer v. independent contractor issue as it continues to evolve.