7-Eleven Franchisee Misclassification Case: Update on AB 5

By Jaspreet Dhillon, NCASEF Treasurer, President, Franchise Owners Association of Greater Los Angeles

California lawmakers passed bill AB 5, Worker Status: Employees and Independent Contractors, on September 11, 2019. Governor Gavin Newsom signed the bill into law on September 18, 2019, and it went into effect in California on January 1, 2020. It affects employers who have independent contractors performing work in California, but it is also incredibly significant to National Coalition members because it directly affects the ongoing misclassification (i.e. independent contractor) lawsuit four franchisees brought against 7-Eleven in 2017.

The misclassification lawsuit, Serge Haitayan, et al vs. 7-Eleven, Inc. was filed in October of 2017, alleging the company misclassified franchise owners in California as independent contractors instead of employees. The franchisees asserted that the pervasive controls that 7-Eleven, Inc. exercises over almost every single aspect of the day-to-day operations of their stores makes all franchisees employees, not independent contractors in the eyes of the law.

On March 14, 2018, United States District Court Judge John F. Walter, in the Central District of California, Western Division, granted judgment in 7-Eleven’s favor.

All was not lost, however, when on Monday, April 30, 2018, the California Supreme Court issued a landmark decision in the matter of Dynamex Operations West, Inc. vs. Superior Court of Los Angeles. In a voluminous 82-page decision, the California Supreme Court reinterpreted and ultimately rejected the Borello test for determining how workers should be classified under the California wage orders. Borello was replaced in favor of a worker-friendly “ABC test.”

The ABC test is a three-step test that determines whether an individual is an independent contractor or an employee. Under the test, a worker is considered an employee unless each of three requirements are met in order to classify the worker as an independent contractor:

  1. The worker is free from the control of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact.
  2. The worker performs work that is outside the usual course 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 work performed for the hiring entity.

On February 27, 2019 the Ninth Circuit Court of Appeals, in the 7-Eleven franchisees’ case, vacated the district court decision and ruled the the court should not have granted judgment in 7-Eleven’s favor. Their case was sent back to the District Court in Los Angeles, where they are represented by Shannon Liss-Riordan of Lichten & Liss-Riordan, P.C. in Boston. She is widely recognized as one of the country’s top class action employment lawyers, and she has chalked up victories against big-name corporations such as Starbucks, FedEx and American Airlines.

But that was not all. On May 2, 2019, the Ninth Circuit Court of California made a decision in the case of Vazquez vs. Jan-Pro Franchising, in which the plaintiffs were individual janitorial employees who claimed that Jan-Pro, a major international franchisor of janitorial cleaning businesses, had developed a sophisticated three-tier franchising model to avoid paying them minimum wages and overtime pay by misclassifying them as independent contractors. The case, a putative class action, had wound its way in the Northern District of California after more than ten years of litigation, but now, after the Dynamex decision, the Ninth Circuit found that franchisors could be considered employers under the ABC test. The Jan-Pro decision strengthened the case of the four franchisees and confirmed that the ABC test applies to franchisees.

Genesis Of AB 5
AB 5 grew out of the 2018 California Supreme Court decision in Dynamex, which announced a new standard for classifying workers as employees. Essentially, Bill AB 5 codifies the Dynamex decision.

Once AB 5 is put into practice, many workers once classified as independent contractors will be eligible for a variety of employee and unemployment benefits. An article on the website of Paylocity, a large American provider of cloud-based payroll and human capital management software, based in Illinois, says these changes could include:

  • Social Security and Medicare withholding, including the employer portion of each
  • Minimum wage and overtime requirements
  • Protections under FLSA and state wage and hour laws
  • Affordable Care Act (Obamacare) offer of coverage
  • State unemployment tax contributions
  • Workers’ compensation
  • State and local paid sick leave
  • Paid family leave requirements
  • Statutory Disability Insurance

AB 5 codified the Dynamex decision and includes exemptions for many professions, including doctors, dentists, insurance agents, accountants, engineers and travel agents.

Essentially, California Assembly Bill 5 sets a standard for determining an independent contractor by adopting the ABC test. The test has its origins in Massachusetts General Law, Part 1, Title XXI, Chapter 149, Section 148B, which states:

A) 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
B) The service is performed outside the usual course of the business of the employer; and,
C) 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.

As AB 5 progresses from bill to application of the bill in real life, it is not without its detractors. For example, measures in the California State Assembly to weaken AB 5 include

—AB 1928, an effort to Repeal AB 5
—AB 1925, an exemption for small businesses
—AB 2489, an exemption for franchising

In the California State Senate, groups are seeking exemptions for their various constituents:
—SB 875, an exemption for interpreters and translators
—SB 867, an exemption for newspaper distributors or carriers
—SB 868, an exemption for freelance journalists
—SB 967, an exemption for franchising

7-Eleven Franchisee Efforts To Support AB 5
California franchisees, FOAs and the National Coalition have all been busy supporting AB 5 and the four franchisees’ lawsuit throughout this time:

—On February 19, 2020, at our urging, three California state senators signed and sent a letter to Commissioner Manual P. Alvarez, at the California Department of Business Oversight, asking for a response from the Department’s Enforcement Division to NCASEF General Counsel Eric Karp’s 2018 letter questioning 7-Eleven Inc.’s long-term franchising strategy.

—On February 25, 2020, we secured the support of Robert Purvin, Chairman and CEO, and the American Association of Franchises and Dealers, the oldest and largest national not-for-profit trade association advocating for the rights and interests of franchisees and independent dealer networks. Purvin and the AAFD are urging opposition to the International Franchise Association’s support for a blanket exemption for franchisors from the application of AB 5.

—On February 26, 27 and  March 5 we held three special meetings spon-sored by the 7-Eleven franchisee Advocacy Group in California on AB 5 and the misclassification lawsuit, one in Sylmar, one in Diamond Bar, and another in San Diego. We urged all California franchisees to call their legislators to take their names off all bills opposed to AB 5.

—NCASEF legal counsel Eric Karp developed an extensive set of talking points for franchisees to use when speaking to their legislators.

—On March 2, 2020, at our urging, AAFD sent a letter to California Senator Andreas Borgeas urging opposition to SB 967, Worker Status: Independent Contractors: Franchiser and Franchisees. This bill, if passed, would create an exemption for franchisees from AB 5. In his letter, the chairman of AAFD explains that, “franchisees need to be owners of their businesses…in our opinion, not all franchises have a franchisor/franchisee relationship that qualifies for containing the basic tenets of business ownership.”

—In early March we marshaled the strength of the National Coalition and California 7-Eleven Franchise Owners Associations by asking every FOA president in California to sign a position letter in opposition to California AB 1928, AB 2489 and SB 967, which would repeal AB 5 and/or grants exemption to Franchising from AB 5. All FOA presidents signed the letters except two.

As a result of our efforts on SB 967 (an ex-emption for franchisees), two Republican State Senators have changed their views. Lin Ling Chang withdrew her support before the bill was introduced, and Vice Chair of the Senate Labor Committee, Mike Morrell, is currently considering withdrawing his support unless the bill is changed considerably to protect franchisees.

As 7-Eleven franchisees, our sales are going up, but our income is going down, resulting in an unfair split. In comparing 2018 vs. 2019 financials, few franchisees have a higher bottom line. We believe that SEI is making a lot of changes, and making more money from vendors and franchisees, but that franchisees are eating the costs.

AB 5 was created to protect workers, including franchisees, and SEI is working to take it away. As one of my fellow plaintiffs said at a recent advocacy meeting, “Franchisees are not against the brand. If you cannot support AB 5, please don’t go against it. SEI fails the ABC test, because franchisors run the same businesses as franchisees. SEI says they do not run c-stores, but the fact is otherwise.”