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Can Franchisees Become Employees of Their Franchisor?

Posted by David Katz | Apr 01, 2022 | 0 Comments

Under Massachusetts state law, employers have to correctly classify employees and independent contractors based on how much control they exert over the worker. Meanwhile, under federal regulations, a franchise is a business relationship where the franchisor has the authority to exert a significant degree of control over the franchisee.

Last week, the Massachusetts Supreme Judicial Court (SJC) decided that these two issues were separate from each other, even though they both deal with how much control one party has over another.

Franchisees Claim They are Employees of Franchisor

In the case, Patel v. 7-Eleven, Inc., the plaintiffs started franchises in Massachusetts. Under the franchise agreement the franchisor, 7-Eleven, controlled numerous aspects of the franchise's operation, but classified the franchisees as independent contractors who were paid from the store's profits, but only after franchise fees were deducted from them.

The franchisees filed a lawsuit, claiming that 7-Eleven violated Massachusetts' independent contractor statute, G.L.c. 149 § 148B, as well as minimum wage law. The trial court tossed the lawsuit, ruling that the independent contractor statute did not apply to franchisee-franchisor relationships because doing so would create a conflict with the state law and federal regulations promulgated by the Federal Trade Commission (FTC), 16 C.F.R. §§ 436.1 et seq.

SJC Distinguishes Franchise Regulations and Independent Contractor Law

The fundamental issue in the case was how the FTC regulations intersected with the Massachusetts independent contractor statute. The trial court had found that the federal regulations conflicted with state law, therefore preempting them.

The SJC, however, disagreed.

The independent contractor statute laid out the test for determining when someone was an employee or an independent contractor, with the goal of preventing a misclassification that unfairly helps the employer. The test presumes that anyone who performs any service for an employer is an employee. Employers can overcome this presumption by showing, among other things, that the worker is “free from control and direction in connection with the performance of the service.”

Meanwhile, the FTC regulations define a franchise relationship as one where the franchisor “will exert or has authority to exert a significant degree of control over the franchisee's method of operation.” If there is to be such a relationship, the regulations require franchisors to provide presale disclosures to prospective franchisees.

While “control” is an essential element for both laws, the SJC ruled that it did not create a conflict between them. Sufficient control in the context of independent contractors turned the worker into an employee, while sufficient control in the context of a franchise triggered disclosure requirements by the franchisor. There was nothing saying that the amount of control had to be identical in both contexts. Franchisors could exert enough control to have to disclose information without exerting enough control to turn a franchisee into an employee.

Furthermore, excluding franchise relationships from misclassification law would potentially allow employers to classify what were truly employment relationships as franchise relationships, rather than as independent contractors. This, according to the SJC, would undermine the whole point of the independent contractor law.

Massachusetts Business Lawyers at the Katz Law Group

Under Patel, franchisors have to comply with both laws, separately. This is good news for franchisees, who may become employees of their franchisor if the franchisor exerts enough control over their operations to fail the test created by G.L.c. 149 § 148B.

Whether you are a franchisor or a franchisee, the franchise attorneys at the Katz Law Group can help in Worcester, Framingham, Marlborough, or in Norfolk or Middlesex Counties or the rest of Massachusetts. Contact him online or call his law office at (508) 480-8202.

About the Author

David Katz

Attorney David S.Katz is the founder and managing partner of the Katz Law Group, P.C., located in Westborough, Massachusetts...


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