7-Eleven Prevails in Employee Misclassification Suit

From JDSupra, Carrie Hoffman and Peter Loh discuss a recent case in California in which the court said the 7-Eleven franchise owners were not employees. Carrie and Peter write:

A federal court for the Central District of California in Haitayan v. 7-Eleven, Inc. has ruled in favor of franchisor 7-Eleven and against four franchise owners who claimed they were employees under California law rather than independent contractors. Serge Haitayan and the three other plaintiffs all had been 7-Eleven franchise storeowners for at least 20 years. Each of them at different times testified that they came to view themselves as 7-Eleven employees instead of independent contractors or business owners due to the amount of control 7-Eleven allegedly exhibited over the operation of their stores.

After a two-day bench trial in March 2021, the Court issued findings of fact and conclusions of law on September 8, 2021. The Court applied the multi-factor test established under S.G. Borello & Sons, Inc. v. Dep’t of Indus. Rels., 48 Cal. 3d 341, 350 (1989). Importantly, because the plaintiffs brought this case in 2017, the Court did not apply the state’s most recent independent contractor law AB5 and its “ABC Test” that most consider more favorable to plaintiffs seeking to establish an employment relationship. This space had extensively covered the California Supreme Court’s 2018 decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles County that established the ABC Test and AB5 that codified it. Borello remains the standard in situations where an exception under AB5 or a later statute, AB2257, applies.

Borello’s multi-factor test centers on a primary question of how much control the alleged employer has the right to exercise over the work at issue as opposed to how much control it actually does exercise. Beyond this question, Borello also applies secondary factors for a court to consider. In 7-Eleven, the Court applied these factors after a thorough recounting of the factual record.

The Court concluded the Haitayan Plaintiffs exhibited a sufficient amount of control over the “manner and means” of the work at issue to preclude the existence of an employer-employee relationship. Plaintiffs admitted during the trial that “they have complete control over when they work, how much they work, and when they take vacations.” Plaintiffs also employed their own workers in their stores and had complete authority over their hiring, firing, wages, discipline, and scheduling. 7-Eleven also granted its franchise owners control over the actual operation of their stores including which products to carry, pricing, inventory levels, and promotions in which to participate.

Conversely, Plaintiffs argued that 7-Eleven monitored and supervised their work through once-a-week visits to the stores from “field consultants” who could issue written notices of failure to follow certain 7-Eleven policies. 7-Eleven also required Plaintiffs to attend training. 7-Eleven could also terminate the franchise relationship, which Plaintiffs had alleged demonstrated an employment relationship.

Even with these allegations, Plaintiffs were unable to persuade the Court that these facts established the level of control necessary to prevail. The Court noted that franchise owners did not have to be present in their store for the field consultants’ visits and could ignore the other correspondence and messages they sent to them. Further, the field consultants could only issue notices of failure to abide by 7-Eleven store standards in a limited number of prescribed circumstances. Plaintiffs also had not attended training in “decades” as it was not a regular part of their relationship with 7-Eleven. Lastly, termination of a franchise could only occur in limited circumstances (i.e. a franchisee’s felony conviction, insolvency, etc.) and required notice and opportunity to cure when possible.

The Court then moved through Borello’s eight secondary factors. They are: a) whether the work at issue is actually a distinct business; b) whether Plaintiffs performed work at the direction of 7-Eleven (essentially duplication of the control factor); c) the skill necessary for the work; d) the source of the instrumentalities, tools, and location of the work; e) length of time in performance of the work; f) method of payment; g) the business of the alleged employer; and h) the parties’ respective beliefs about their relationship. The Court’s application of the factors follows below.

  • Is the work at issue a distinct business? Plaintiffs held themselves out to the public and for tax purposes as independent, self-employed business people. They could sell their franchised stores to third-parties and also operate other (sometimes competing) businesses. These facts led the Court to conclude this factor weighed against employment because Plaintiffs operated distinct businesses. For the reasons already explained, the Court found that Plaintiffs were not under the control of 7-Eleven through its field consultants. This factor, too, weighed against employment.
  • Is the work at issue at the direction of the alleged employer? This factor was essentially duplicative of the primary factor of control discussed above. Plaintiffs had to undergo extensive training to be a 7-Eleven franchise owner indicating a requirement of specialized knowledge. Storeowners’ decision making with regard to personnel, products, and pricing all led to their success or lack thereof. These facts indicated independent business ownership and, thus, against employment.
  • Does the work require specialized skill? Plaintiffs owned all of the merchandise in their stores. 7-Eleven, however, leased the property for the stores to Plaintiffs as well as all of the equipment and computer systems. These facts tended to indicate an employment relationship in favor of Plaintiffs.
  • What is the length of time involved for the work? The franchise agreements were often 15 years in length, and Plaintiffs each had owned their respective stores over decades. This indicated employment, but a shorter term would not make economic sense either. Plaintiffs would not have been able to recoup their investments. This factor was neutral on the question of employment.
  • What is the method of payment? While hourly payments typify employment, payment by the job indicates independent contractor status. 7-Eleven did not guarantee any payments to Plaintiffs. Their income came entirely from the performance of their stores. This weighed in favor of 7-Eleven and against an employment relationship.
  • What kind of business is the alleged employer in? Plaintiffs portrayed 7-Eleven as an operator of convenience stores. 7-Eleven presented evidence that it was in the business of franchising. The court agreed with 7-Eleven and found that 7-Eleven locates and develops store sites, markets and sells franchises, formulates recommended practices for store operations, develops new products, and provides support to its franchisees. Plaintiffs did not do any of those things. This weighed in favor of Plaintiffs being independent contractors—not employees.
  • How do the parties view their relationship? Plaintiffs held themselves out as independent business people even after the filing of their suit. One plaintiff advised other franchisees to make their own decision regarding a product promotion experiencing mixed sales results. Another told franchisees that they were independent contractors and not at-will employee store managers. Finally, the franchise agreements that the plaintiffs executed explicitly stated that they were independent contractors. Plaintiffs’ relatively recent “realization” that they were employees was unconvincing. The Court found this factor in 7-Eleven’s favor.

7-Eleven is an important case for “business format” franchises whom, like 7-Eleven, exercise the right to maintain and enforce their brand standards through specified products, methods, and means for the operation of the franchises. The application of the Borello factors as opposed to the more recent and arguably more stringent ABC Test does lessen its overall significance.

Source: 7-Eleven Prevails in Employee Misclassification Suit | Foley & Lardner LLP – JDSupra

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