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Are 7-Eleven Franchisees Employees or Independent Contractors?

Judge rejects national coalition’s arguments that allege excessive franchisor control

SANTA CRUZ, Calif. -- The conclusion that franchisees are not employees of their parent company stood at the center of a judge's March 13 ruling to dismiss a lawsuit between 7-Eleven Inc. and franchisees.

"The existence of a franchise agreement alone does not create an agency or employment relationship," a California judge has ruled in dismissing a lawsuit by the National Coalition of Associations of 7-Eleven Franchisees (NCASEF) against 7-Eleven Inc.

As reported in a CSP Daily News Flash, U.S. District Judge John F. Walter has ordered the two sides to reach a joint agreement on both the claims and counterclaims in the lawsuit.

On Oct. 12, 2017, members of Universal City, Texas-based NCASEF filed a lawsuit against franchisor 7-Eleven Inc., alleging that the Irving, Texas-based company has been “chipping away at their profits, increasing their costs and exercising more control over what is supposed to be an independent operation.” In the lawsuit, the plaintiffs claimed that the franchisor has not fulfilled its promise of treating franchisees as independent contractors and business owners.

Despite the plaintiffs wanting to be considered independent contractors, NCASEF’s claims against 7-Eleven are based on the idea that, in practice, the franchisees are essentially employees of 7-Eleven because of the control the franchisor exerts on the franchisees. “The basic legal theory underlying [NCASEF’s] claims is that 7-Eleven’s restrictive policies and practices created an employment relationship between the parties. Accordingly, the threshold question before the court is whether an employment relationship exists between the parties,” the court document said.

7-Eleven requested a summary judgment on the case on the grounds that 7-Eleven is not the plaintiffs’ employer.

Neither 7-Eleven Inc. nor the National Coalition of Associations of 7-Eleven Franchisees (NCASEF) responded to a CSP Daily News request for comment on the decision by posting time.

In a franchisee newsletter, however, NCASEF Chairman Jatinder Singh said, “The California lawsuit filed by four franchisees and unanimously supported by all [franchise owners associations] and the national coalition board has been dismissed by the judge. … As chairman, along with the executive committee, we take full responsibility, if any, on behalf of the board members for this decision.”

In a previous statement responding to the franchisees’ lawsuit, 7-Eleven Inc. said, “For most of the past three decades, 7-Eleven Inc. has enjoyed a productive working relationship with the leadership of the National Coalition of Associations of 7-Eleven Franchisees. We are disappointed that some within the coalition leadership have chosen to abandon that relationship.”

Franchising Relationship

NCASEF and 7-Eleven have a “business-format” franchising relationship, according to the court documents. Under this model, the franchisee pays royalties and fees for the right to sell products or services under the franchisor’s name and trademark following a system of standards and procedures. The goal, which benefits both parties, is to build and keep customer trust by ensuring consistency and uniformity in the quality of goods and services and the design of the stores.

The fact that a franchisor imposes constraints on a franchisee and sets standards for acceptable service quality does not in itself create a right of control, the court documents said. Generally, where a franchise agreement gives the franchisor the right of complete or substantial control over a franchisee, an agency relationship exists; however, a franchisor’s interests in the reputation of its entire system allows it to exercise certain controls over the enterprise without running the risk of transforming its independent contractor franchisee into an agent.

NCASEF believes franchisees should be considered employees of 7-Eleven even though they agreed they were independent contractors in their franchise agreements. The legal theory underlying NCASEF’s claims is that 7-Eleven’s restrictive policies and practices created an employment relationship between the parties.

NCASEF argues that 7-Eleven exercises control over wages because it determines the amount and timing of the conditional draws paid to 7-Eleven. It also argues that 7-Eleven exercises control over store hours by requiring franchisees to keep their stores open 24 hours a day, 364 days a year, and that it exerts extensive control over working conditions, including details such as keeping stores at a specific temperature. The plaintiffs also argue that 7-Eleven controls the payment of all wages and instructs franchisees on pay practices, performance appraisals and disciplinary actions, including worker terminations.

“The court does not find plaintiffs’ arguments persuasive,” the judge said.

Question of Control

7-Eleven’s requirements that franchisees keep their stores open and at a specific temperature are standards designed to advance the goal of maintaining conformity to certain operational standards and details from store to store, the court documents say. The plaintiffs themselves are not required to work at the stores a particular number of hours or on particular days.

And the fact that 7-Eleven exercises control over conditional draws is insufficient to show that it exercises control over the plaintiffs’ wages, the court documents say; the franchise agreements clearly provide that the draws represent the net profits from income earned from franchisees’ stores after franchise fees and operational expenses are paid. It is undisputed that 7-Eleven does not cap the amount of revenue a store may earn or the dollar amount of net profits the plaintiffs may receive. Accordingly, 7-Eleven’s control over the payment of the draws does not in any way restrict the wages or profits the plaintiffs may earn as franchisees, the court documents say.

NCASEF’s argument that 7-Eleven controls the payment of all wages and instructs the plaintiffs on pay practices, performance appraisals and disciplinary actions, including worker terminations is “unpersuasive,” said the court documents, citing other courts’ opinions that a franchisor pays a franchisees’ employees’ wages does not create an employment relationship. Also, franchisees have the discretion to hire and fire employees and set wages.

The court concluded that NCASEF did not demonstrate that 7-Eleven exercises control over the plaintiffs’ wages, hours or working conditions and can’t show that an employment relationship exists. The court also concluded that NCASEF has not demonstrated that 7-Eleven exercised the type or degree of control necessary to create an employment relationship between the parties. NCASEF has not shown that 7-Eleven exerted control over the day-to-day operation of franchisees’ stores. Instead, the allegations demonstrate that 7-Eleven retained control over service standards, merchandise selection and presentation, hours of store operation, employee uniforms and other aspects of store operations that were necessary to protect 7-Eleven’s trademark, trade name and goodwill.

The judge dismissed the case and ordered the parties to meet within the week. "The parties shall lodge the joint proposed judgment with the court on or before March 19, 2018," the court document said. "In the unlikely event that counsel are unable to agree upon a joint proposed judgment, the parties shall each submit separate versions of a proposed judgment along with a joint statement setting forth their respective positions no later than March 19, 2018."

"7-Eleven’s counterclaim, which seeks declaratory relief in the event plaintiffs are deemed employees, is dismissed as moot," the judge said. "7-Eleven’s third-party complaint, which seeks indemnification and declaratory relief from a third party related to one of the plaintiff’s claims, is also dismissed as moot."

With 10,000 c-stores in the United States, 7-Eleven ranked No. 1 in CSP's2017 Top 202 list of the largest c-store chains.

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