Earlier today, federal judge Dale Fischer in California issued a decision after a lengthy non-jury trial earlier this year, concluding that four 7-Eleven franchisees had been properly classified as independent contractors and were not employees under applicable California law. The decision is not a validation that all franchisees are independent contractors. To the contrary, Judge Fischer pointed out how the facts in this case differ considerably from those involving commercial cleaning franchisees. Further, the decision today does not involve the infamous California “ABC” test for determining independent contractor status. Nonetheless, the decision shows that longstanding and well-established franchisors like 7-Eleven can prevail in these types of cases when the legal standard is a multi-factor test focusing on whether the franchisor has properly avoided directing and controlling the manner and means by which the franchisee provides services.
The test applied by the court in this 7-Eleven case was not the standard first enunciated by the California Supreme Court in its 2018 decision in Dynamex or the state’s new independent contractor law, AB5 (which has since been amended by AB2257), which codified Dynamex. Rather, the lawsuit, which was brought in 2017, was for expense reimbursement under a California Labor Code section that used the so-called Borello test to determine independent contractor status. That test is no longer applicable in California to determine independent contractor status unless the case involves one of the exclusions set forth in the AB5 / AB2257 law. Therefore, for industries not covered by one of those exclusions, this 7-Eleven decision may be of limited value in California. For those industries covered by Borello or subject to a comparable multi-factor test under federal or another state’s laws, this decision should give comfort to franchisors that operate in a manner similar to 7-Eleven.
The court’s decision was issued following a non-jury trial involving claims by individuals who had been 7-Eleven franchisees for over two decades. It pitted the world’s largest franchisor of retail convenience stores against a plaintiffs’ class action law firm that has brought some of the most noteworthy independent contractor classification lawsuits over the past decade. But like another non-jury independent contractor misclassification trial that was the subject of one of our blog posts a few years ago involving a gig economy company, GrubHub, the evidence indicated that the plaintiffs’ testimony was not reliable in many instances and actually supported their classification as independent contractors.
As the court pointed out in detail in its decision, 7-Eleven’s counsel presented salient facts demonstrating among other things that the plaintiffs themselves acknowledged just prior to the lawsuit that they were independent contractors who had the right to control prices, publicly claimed they should not be treated like store managers employed on an at-will basis, treated themselves as business owners on their tax returns, often chose not to follow 7-Eleven’s suggestions, hired their own workers, controlled the time they worked in the convenience stores, operated competing businesses, and could sell their franchises for a profit.
The court first analyzed the primary Borello factor, control, and stated that the evidence “compels the conclusion that Plaintiffs were independent contractors.” The court noted that plaintiffs exercised their own judgment in determining, among other things: what products they would carry, how to price the products, how to organize the store, what promotions to take part in, whom to hire or fire, the scheduling of employees, how often and when Plaintiffs would be present at their stores, and what draws to take from the stores and when.
The court then examined eight “secondary factors” and concluded that only one of the secondary factors favored employee status and one factor was neutral, while the remainder all favored independent contractor status. Of particular interest is the court’s conclusion that with regard to the factor regarding the length of time for which the services have been provided, “[t]his factor generally would weigh in Plaintiffs’ favor.” However, the court continued: “But it would not make economic sense for a franchisee to invest in a franchise with a term too short for the franchisee to recoup his or her investment.” As a result, the court found this factor to be neutral.
As to the factor whether the work is part of the regular business of the principal, the court concluded as follows: “[T]he evidence shows 7-Eleven’s core business is franchising, not operating convenience stores. 7-Eleven primarily locates and develops store sites, markets and sells franchises, licenses the right to use its intellectual property, develops an operations manual that sets forth its recommended practices, leases property and equipment, conducts advertising, develops new products, and provides back office support and business advisory assistance to franchisees….Plaintiffs do none of these things. Instead, they order and price products, maintain equipment, hire and oversee employees, and operate the stores.”
The court’s view was not influenced by evidence introduced by the plaintiffs that 7-Eleven operates some company-owned locations. The court found that the revenues produced by such stores was only about 1% of total revenues and therefore did not alter the court’s finding that the regular business of 7-Eleven was franchising, not store operations.
This case is a perfect example that many businesses can create a compliant alternative to an employee model, when the structure, documentation, and implementation have been thoughtfully constructed. Many businesses seeking to enhance their level of compliance with independent contractor laws have chosen to use a process such as IC Diagnostics (TM), which assesses the current level of compliance of an independent contractor relationship, restructures and re-documents the relationship to the extent necessary, and re-implements the manner in which the relationship is carried out, in a customized and sustainable manner consistent with the company’s existing business model.
While 7-Eleven’s compliance with independent contractor laws could be further enhanced in a vacuum, the manner in which it has operated appears to balance its business objectives and the law in those states where the test for independent contractor status is a fair and reasonable test such as the Borello test that the court applied in this case. Interestingly, based on the findings of the court in the 7-Eleven case, that company may have a strong case that it can even meet the ABC test in Dynamex as well as AB5 as amended.