An important decision from a state supreme court has ruled that franchisees may be entitled to protection as employees, including minimum wage laws and other worker protections.
Franchisees (people who buy a franchise) are typically treated as independent contractors, legally separate from the franchisor (the company that sells the franchise). Unlike employees, independent contractors are not entitled to basic protections like being paid the minimum wage, unemployment insurance, or worker's compensation.
This case, however, attempted to change things and give more of those protections to franchise owners.
Franchisees who owned a 7-Eleven convenience store sued 7-Eleven. Though the franchise agreement said that the franchisees were independent contractors, they alleged that 7-Eleven was actually required to treat them as employees, with the accompanying protections.
7-Eleven objected, filed a motion to dismiss the case, and the franchisees’ lawsuit was dismissed.
By no means was that the end of the case, however.
The franchisees appealed the adverse decision to the Federal Court of Appeals, contending that the lower court got it wrong. The Court of Appeals asked the state supreme court to provide guidance on the applicable state law, leading to the decision at hand.
The state supreme court reiterated the state-law test for whether someone is an employee or a contractor. The case was filed in Massachusetts, so it used that state’s three-part test for whether someone is an independent contractor and thus subject to control of the alleged employer-franchisor.
(1) The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and
(2) The service is performed outside the usual course of the business of the employer; and,
(3) the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
The court focused on the first part of the test, whether the franchisee was free from control and direction of the franchisor. As many franchisees understand, they are often constrained to follow very specific directions from their franchisors as to virtually every aspect of their business. As such, franchisees may very well be considered independent contractors.
The state court did not make a decision on the outcome but instead sent the case back to the Federal Court of Appeals for a final determination. Based on the language of the court’s opinion, however, it appears likely that 7-Eleven will be deemed an employer, and that the franchisee’s claims will continue.
The case was not decided under North Carolina law, however. In North Carolina, we have an eight-part test that looks at the totality of the circumstances to determine whether an independent contractor (including a franchisee) is actually an employee. The North Carolina test is as follows:
[Whether] The person employed (a) is engaged in an independent business, calling, or occupation; (b) is to have the independent use of his special skill, knowledge, or training in the execution of the work; (c) is doing a specified piece of work at a fixed price or for a lump sum or upon a quantitative basis; (d) is not subject to discharge because he adopts one method of doing the work rather than another; (e) is not in the regular employ of the other contracting party; (f) is free to use such assistants as he may think proper; (g) has full control over such assistants; and (h) selects his own time.
This test is from the North Carolina Supreme Court’s decision in the case of Hayes v. Board of Trustees, 224 N.C. 11, 29 S.E.2d 137 (1944).
This test is meant to evaluate for the same issue as in the lawsuit, the employer’s “right of control.” The North Carolina Supreme Court holds to determine an employer’s “right of control,” no “particular one of these factors is controlling in itself, and all the factors are not required. Rather, each factor must be considered along with all other circumstances to determine whether the claimant possessed the degree of independence necessary for classification as an independent contractor.”
So what does the decision mean for franchise owners in North Carolina? It isn’t a clear win for additional protections for them, the decision having been made under a slightly different test that we use. However, the tests substantially overlap and make it more likely that franchisees who have disputes with their franchisors will bring legal claims to assert the right to be treated fairly.
The court’s opinion is here:
Dye Culik PC is a business and franchise attorney based in Charlotte, North Carolina. We represent small businesses, entrepreneurs, and franchises related to all types of business issues and disputes. If you are a franchisee with a question or a dispute involving your business, contact us to see how we can help you.