Massachusetts High Court Rules Franchisees May Be Employees of Franchisors

Some franchisees may no longer be classified as independent contractors in Massachusetts. Asked whether the three-prong test for independent contractor status applies to the franchisor-franchisee relationship, the Massachusetts Supreme Judicial Court determined that a franchisee can be considered a company's employee.

As employees, franchisees may be entitled to additional benefits, such as overtime pay, unemployment insurance and franchise fee exemptions, that are not typically available to independent contractors.

In the Massachusetts SJC case, Dhananjay Patel v. 7-Eleven, the convenience store franchise was sued by franchisees. The franchisees argued that 7-Eleven maintained control over their business operations and finances to an unusual degree, including controlling the store’s bank account and imposing strict rules for day-to-day operations. Because the franchisees felt they were treated as employees rather than business owners, they argued that they were entitled to benefits and protections awarded to employees under Massachusetts law.

Massachusetts law presumes that any individual performing services for an employer is an employee. However, an employer — the franchisor in these cases — can oppose this presumption by establishing that the franchisee meets the following criteria of an independent contractor:

1. The individual is free from control and direction of the hiring entity;

2. The work performed by the individual is outside the usual scope of the hiring entity’s business;

3. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the services provided for the hiring entity.

7-Eleven warned that the SJC’s decision could be catastrophic for the franchise industry in Massachusetts, but the court stood firm by its ruling.

“Despite 7-Eleven’s dire predictions that application of the ABC test to franchise relationships will end franchising in the Commonwealth, other courts have done so apparently without the predicted apocalyptic end of franchise arrangements in their respective jurisdictions,” the court wrote.

The SJC case incentivizes franchisors to review their franchise agreements to avoid potential misclassifications of franchisees as employees.