Trial court rejects claim that 7-Eleven misclassified franchisees as independent contractors

Convenience store chain 7-Eleven, Inc. received a major victory when, on September 8, 2021, the Federal District Court for the Central District of California issued its post-trial findings of fact and conclusions of law in a pair of related independent contractor misclassification lawsuits.

In Haitayan et al. v. 7-Eleven Inc., CV 17-7454 DSF and CV 18-5465 DSF, four 7-Eleven franchisees in California claimed they had been misclassified as independent contractors and were entitled to damages under both the Fair Labor Standards Act (FLSA) and the California Labor Code.  The lawsuits originated as putative class actions brought on behalf of each of the more than 1,000 franchisees in California. The trial court denied class certification earlier this year.

After a two-week bench trial, the court rejected all of the plaintiffs’ claims, holding that the individuals were properly classified as independent contractors under the multi‑factor test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989). 

In California, the Borello test has – in most cases – been superseded by the ABC test for independent contractor misclassification codified in AB-5.  Nevertheless, the trial court’s conclusions of law and findings of fact in Haitayan are instructive for franchisors seeking to rebut misclassification claims under either test.

Case background and California’s independent contractor standard

In 2017, four 7-Eleven franchisees in California filed suit alleging that they had been misclassified as independent contractors and were entitled to damages under both the FLSA and the California Labor Code. The complaint asserted that plaintiffs were improperly denied overtime wages and that 7‑Eleven had failed to indemnify them for certain expenses, including the payroll the franchisees paid their employees.

The protections afforded by the FLSA and the Labor Code apply only to employees. As a result, all of the plaintiffs’ claims hinged, in the first instance, on whether the plaintiffs had in fact been misclassified.  The standard for resolving that controlling question changed during the course of the case.

For over 30 years, California courts had resolved misclassification questions by applying the multi-factor test that the California Supreme Court laid out in Borello. According to that decision, “[t]he principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired....”[1]

In addition, to account for the “infinite variety” of relationships, Borello also considered several “secondary indicia” in determining whether an individual was an employee or independent contractor, including “whether the one performing services is engaged in a distinct occupation or business” and “whether or not the work is a part of the regular business of the principal.…”[2] 

In April 2018, the California Supreme Court issued a new opinion, Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018), which abandoned the independent contractor test set forth in Borello – at least for purposes of claims under the state’s wage orders – and held that whether someone was an independent contractor had to be answered by applying the ABC test. Under that test, later codified by the California legislature in AB-5, a worker is presumed to be an employee unless the hiring entity establishes each of the following:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.[3]

The A prong of the ABC test is similar to the principal “control” factor in Borello, and the B and C prongs of the ABC test are similar, if not identical, to the abovementioned secondary factors of the Borello test.

By the time of trial, the case had narrowed to a claim for expense reimbursement under Section 2802 of California’s Labor Code, and the trial court had ruled that Borello, rather than a retrospective application of Dynamex, would apply to the misclassification question.

The trial court’s findings and takeaways for future litigation

In its findings of fact and conclusions of law, the trial court determined that 7-Eleven satisfied the primary Borello control test because the plaintiff franchisees both controlled the manner and means for accomplishing their work and exercised significant control over their own businesses.  For example, the trial court found that the plaintiff franchisees controlled their stores’ operations, decided which products to carry and their price, were free to sell their franchises to others and received remuneration based solely on the profits generated by their franchises.

In addition, the trial court concluded that at least six of the eight secondary Borello factors favored 7‑Eleven, including both secondary factors that correspond to prongs B and C of the ABC test.  Significantly for any future ABC test determinations, the trial court found that, even though 7-Eleven operated some company-owned convenience stores, the evidence presented at trial demonstrated that the store chain’s core business was franchising.  The court further found that the relationship between a franchisor and a franchisee is consistent with a business, as opposed to an employment, relationship.

In making these findings, the trial court focused on 7-Eleven’s efforts to locate and develop store sites, market and sell franchises, and provide back office and business advisory assistance to franchisees.  The trial court additionally weighed the California legislature’s treatment of franchising as a business, the fact that 7-Eleven generated the vast majority of its profits from its franchise operations, and the testimony of 7‑Eleven’s expert that economists define a company’s regular course of business by the predominant manner in which it generates profits.  These findings may help guide other franchisors attempting to rebut future misclassification claims by their franchisees. 

DLA Piper represented 7-Eleven in the case.  Learn more by contacting the authors.