Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. N.J.: 7-Eleven franchisees adequately pleaded employee status in support of FLSA wage claims, (Aug 8, 2014)

By Edward L. Puzzo, J.D.

Purported 7-Eleven franchisees’ FLSA wage and hour claims survived a motion to dismiss because they adequately pleaded factors indicating that they were employees rather than independent contractors, the federal district court in Camden, New Jersey has ruled (Naik v. 7-Eleven, Inc., August 5, 2014, Bumb, R.).

Plaintiffs were putative franchisees of 7-Eleven. The franchise agreement they signed specified that they were franchisees and independent contractors, not employees, of 7-Eleven. However, the plaintiffs alleged that, in economic substance, they were actually employees of the franchisor. They asserted claims for unpaid wages, minimum wages, and overtime wages under the New Jersey Wage and Hour Law (NJWHL) and the Fair Labor Standards Act (FLSA). 7-Eleven moved to dismiss.

The court noted that the plaintiffs’ claims under the NJWHL and FLSA were dependent on establishing an employer-employee relationship with 7-Eleven. While the franchise agreement characterized the plaintiffs’ relationship to 7-Eleven as that of a franchisee or independent contractor, that language was not dispositive of the issue, the court continued.

Test for employee status unsettled. The appropriate test to be applied to make the determination of employee status for purposes of the New Jersey Wage Payment Law and New Jersey Wage and Hour Law is currently an unsettled question in New Jersey, pending before the New Jersey Supreme Court. Therefore, the court denied 7-Eleven’s motion to dismiss plaintiffs’ NJWHL claims without prejudice, pending resolution of this issue in the state supreme court.

FLSA. When determining whether someone is an employee under the FLSA, the courts must look at the circumstances of the whole activity, and determine, as a matter of economic reality, whether the individuals are dependent upon the business to which they render service. The court discussed six factors used in making this determination.

Right to control. Plaintiffs alleged that the franchisor exercised control over them by, among other things, processing plaintiffs’ payroll through its internal payroll system, requiring plaintiffs to wear uniforms, recording plaintiffs’ conduct through a security system, controlling the level of heating and air-conditioning in the stores, and preventing plaintiffs from owing interests in other business entities. The court concluded that, with regard to the level of employer’s control, plaintiffs’ assertion that they were employees was adequately pleaded.

Opportunity for profit or loss. Certain factors related to the opportunity for profit and loss weighed in favor of independent-contractor status, the court stated, such as the absence of a salary and plaintiffs’ capital investment. However, other allegations weighed in the opposite direction, such as allegations that prices from vendors negotiated by 7-Eleven were higher than what plaintiffs could have obtained elsewhere and the requirement that plaintiffs carry, against their will, certain items they deemed difficult to sell. This factor was therefore neutral, stated the court.

Investment in equipment. The fact that plaintiffs made substantial investments in franchise fees and franchise-specific investments within each store was a factor indicating independent-contractor status, the court stated.

Special skills. A finding that a worker requires special skill to complete their tasks or services weighs in favor of a finding that the worker is an independent contractor, the court stated. Here, such skills were indicated by the purchase of inventory by these in-store operators, the court opined.

Permanence of relationship. Where persons work for a purported employer exclusively and for a continuous period of time, this factor will be found to weigh in favor of classifying workers as employees, the court stated. The court noted that the franchise agreement here called for an initial store lease of four years, which could be further extended. Additionally, the franchise agreement prevented plaintiffs from operating or having an interest in a competitive business within a half-mile radius. These factors weighed in favor of a level of permanence in the relationship sufficient to support an employer-employee relationship, opined the court.

Service integral to business. On the issue of whether the work performed was an essential part of the alleged employer’s business, the court noted that it was unclear how the franchisor could operate the business without the plaintiffs. The court concluded that the plaintiffs were integral to the operation of the purported franchise and that this factor weighed in favor of an employer-employee relationship.

Economic reality. In addition to the above six factors, the court reviewed the whole activity to determine whether, as a matter of economic reality, the plaintiffs were dependent upon the business to which they rendered service. Plaintiffs cited numerous instances of the franchisor’s control of their business which, they maintained, undercut their opportunities for profit or loss. The franchisor countered that the instances cited were merely quality control measures franchisees were expected to use to insure uniformity. The court stated that plaintiffs’ allegations, viewed in their totality, depicted an economic reality of dependence on 7-Eleven, indicative of an employer-employee relationship.

Based on the above factors and viewing the allegations in a light most favorable to plaintiffs, as it must for purposes of motions to dismiss, the court found the plaintiffs to have sufficiently pleaded the existence of an employer-employee relationship for purposes of FSLA claims. Thus 7-Eleven’s motion to dismiss was denied.

The case is Civil Action No. 13-4578 RMB/JS.

Attorneys: Gerald A. Marks, Louis D. Tambaro and Evan M. Goldman (Marks & Klein LLP) for Neil Naik, Hemang Patel, Jayesh Patel and Kalpana Patel. Stephen Sussman (Duane Morris LLP) for 7-Eleven, Inc.

Companies: 7-Eleven, Inc.

Cases: FranchisingDistribution NewJerseyNews