In Naik v. 7-Eleven, Inc., (U.S. District Court. D.N.J., Civil No. 13-4578), certain 7-Eleven franchisees in New Jersey alleged that they are employees, not independent contractors, of the franchisor, and that the franchisor violated the federal Fair Labor Standards Act (FLSA) and other New Jersey statutes.  7-Eleven made a motion to dismiss, which was denied by the court.

Each plaintiff entered into a franchise agreement with 7-Eleven.  Despite clear language in the franchise agreement indicating that the franchisees operated independently owned and operated businesses, the franchisees claimed that the “economic reality” was that they were employees of the franchisor and entitled to protections under the FLSA, New Jersey Wage and Hour Law and the New Jersey Law against Discrimination.

In an effort to support their claim, the franchisees relied on numerous factors, including:

  • The Franchisor asserts a high level of control over vendor and suppliers, product pricing and advertising;
  • Payroll is processed through the franchisor’s payroll system;
  • Franchisee’s required to wear uniforms designated by Franchisor;
  • Franchisor’s managers oversee Franchisee’s locations on a daily basis;
  • Franchisor controls the volume of store televisions and thermostat from their corporate headquarters;
  • Franchisees are prohibited from having active business interests in other ventures;
  • Bookkeeping and accounting is done by the Franchisor and the Franchisee cannot withdraw money without the Franchisor’s consent.

In denying the Franchisor’s motion to dismiss, the court noted that the issue of the classification of an independent contractor vs. an employee for purposes of New Jersey wage claims was still unsettled and the issue was in the process of being examined by the New Jersey Supreme Court.  However, the Court did take note that the Franchisor has exerted significant and pervasive control over the Franchisee’s operations.

While the court has yet to issue a final decision on this case, it certainly serves as a stark reminder for Franchisors  to evaluate whether the controls it exerts over its franchisees are necessary to protect brand standards or whether the controls go above and beyond this need.