California Assembly Bill 5, or, AB5, the recently signed gig-work reform law that categorizes workers either as employees or independent contractors, is at the heart of a battle between 7-Eleven, Inc., the chain’s parent company, and its franchise owners, a large majority of whom are Indian Americans.
There has been growing tension between the two, with 7-Eleven, Inc. fighting the law and franchise owners claiming the company is treating them like store managers, not business owners.
“Besides being just about the gig economy, AB5 also affects Seven-Eleven, Inc. (SEI). Due to the nature of their oppressive contract/agreement, we the 7-Eleven franchisees are just like glorified managers,” Jaspreet Dhillon, an Indian American 7-Eleven franchisee in the Los Angeles area and president of the local association, told India-West.
Dhillon, also treasurer of the National Coalition of Associations of 7-Eleven Franchisees, the independently elected body representing the interests of more than 4,000 U.S. franchises, stated: “SEI is trying to get an exemption for franchising in California from AB5 instead of changing the structure of their agreement to satisfy the ABC test and therefore AB5. AB5 will force SEI to change the status quo by either accepting us as employees and its legal consequences or change the structure of its agreement to satisfy AB5.”
The NCASEF said it supports the law and disputes the International Franchise Association’s claim that it will make “franchising’s future uncertain in California.”
On its website, the IFA says, “For franchisees, remaining in control of your own business is of paramount concern and could be jeopardized by AB5.”
Unlike franchise owners in other well-known brands like McDonald’s and Planet Fitness, 7-Eleven operators are not actually independent contractors because 7-Eleven, Inc. in fact, runs the stores, the NCASEF said in a press release.
The franchisees own none of their own fixtures or equipment; they are not party to the lease for their location; and they must deposit all sales receipts into SEI’s business bank account.
7-Eleven franchisees cannot be in control over their businesses, given the nature of SEI’s franchise agreement, which, among other things, requires that payroll and tax obligations be funneled through SEI. In fact, franchisees are not even allowed to control the thermostats in their stores.
AB5 replaces the common law test with the ABC test to determine whether a worker is an employee or an independent contractor in California.
Hiring companies are required to classify workers as employees unless they meet all conditions of the ABC test: The person 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; the person performs work that is outside the usual course of the hiring entity’s business; and the person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
7-Eleven, Inc., according to the press release, claims that its franchisees should not be covered by AB5 and is attempting to persuade state legislators to grant a carve-out for franchising in the AB5 law. A similar effort by 7-Eleven to obtain a carve-out in Massachusetts failed.
In an email to all California franchisees, SEI’s chief franchising officer Greg Frank wrote, “We are pursuing legislative changes to make clear that AB5 does not apply to franchising,” added the press release.
Coronavirus has wreaked havoc on businesses across the spectrum but for 7-Eleven owners like Dhillon, the effect is more pronounced. California’s sales tax deferment program came as a huge relief for businesses but not for 7-Eleven store owners because SEI controls the finances of every store and requires franchisees to deposit receipts from store operations daily – even over weekends – into a bank account owned by SEI, and failure to do so is considered a “breach of contract,” noted Dhillon.
He added that he has been at the forefront of a fight to bring to light “SEI’s predatory business practices.”
“I had to fight SEI so that we could avail of Governor Newsom’s aid for deferring the sales tax collected for the first and second quarter of 2020 for up to $50K,” Dhillon told India-West. “According to our agreement, we have to deposit the daily sales receipts by using the bank’s night drops…So the sales tax collected was sitting in their bank accounts. I emailed attorney general, whom I had met before on this issue. I had to involve state senators like Steven Glazer, chairman of the business, professions and economic development committee. Senator Scott Wilk ended up introducing me to the California Department of Tax and Fee Administration before SEI relented and released to us the sales tax collected.”
Dhillon continued: “But they still made it difficult by requiring us to go on their portal to request it and signing an acknowledgement of sorts, basically scaring the franchisees so that only a fraction of franchisees took advantage of the program while SEI is enjoying the cash flow intended for us.”
Another roadblock they encountered was while trying to secure the Paycheck Protection Program loan since the Small Business Administration does not recognize 7-Eleven franchisees as independent small businesses.
“We barely were able to get the PPP loan. SBA had to make special provisions for 7-Eleven franchisees. This has been going on for the last 30 plus years. About seven-eight years ago, 7-Eleven, Inc. tried again but refused to change their agreement to satisfy the SBA’s requirements,” the entrepreneur told India-West.
Commenting on their “litigious relationship,” Dhillon stated that currently, there are three potential class action misclassification lawsuits by franchisees, claiming that they are employees rather than independent business owners/independent contractors as specified in their agreement/contract.
“The lawsuits are in Massachusetts, California and Illinois,” Dhillon, who is one of four plaintiffs in California, told India-West. “Both Massachusetts and California have strong laws defining employee vs independent contractor, i.e., the ABC test. The law in Illinois is not as strong. Serge Haitayan is a franchisee from Fresno, Maninder (Paul) Lobana is a franchisee from Los Angeles, and Robert (Bob) Elkins is a franchisee from San Diego.”
As businesses are trying to navigate the tough economic crisis, Dhillon said that 7-Eleven store owners have been hit particularly hard and are struggling to stay afloat. It wasn’t a smooth run for them even before the outbreak, he noted.
The path forward for franchise owners – who are often immigrants from India, Pakistan, Bangladesh, Sri Lanka, Korea and Middle East – appears very bleak, he said.
“Between the rising minimum wage standards and SEI’s oppressive agreement plus their regressive royalty structure and add the pandemic to the mix, franchisees are turning in their keys and walking away empty handed after years of putting in hard work and hoping to cash in on their sweat equity that they had built in the stores,” Dhillon told India-West. “Others are waiting for the PPP money to run out before they hand in their keys. Numbers of 7-Eleven stores available for sale is at historic high nationwide.”