The Franchise Memorandum

In another case analyzing the amount of control exerted by 7-Eleven over its franchisees, a federal court in Illinois dismissed a franchisee’s putative class action seeking relief under Illinois’ Wage Payment and Collection Act (IWPCA). Patel v. 7-Eleven, Inc., 2020 WL 3303003 (N.D. Ill. June 18, 2020). In his complaint, plaintiff Niral Patel contended that 7-Eleven’s franchise agreements, including the franchise agreement between 7-Eleven and Shanti 11, Inc. (a corporation wholly owned by Patel), constituted agreements to pay wages governed by the IWPCA. Under the franchise agreement, Shanti 11 was required to deposit daily revenue into an account controlled by 7-Eleven and, after 7-Eleven deducted certain franchise fees, a share of the profits was distributed to Shanti 11 and Patel. Patel argued that these distributions constituted wages and that the franchise fees that were withheld constituted improper deductions under the IWPCA. The court disagreed.

Patel’s arguments centered around the control 7-Eleven exerted over the day-to-day operations of its franchisees (including their finances), claiming that the franchise agreements acted as agreements to pay wages and Patel and others similarly situated were essentially acting as employees of 7-Eleven. The court acknowledged the extensive control 7-Eleven exerts over its franchisees; however, relying on the dependency of the profit distribution payments on customer sales, the court rejected Patel’s notion that the funds paid to its franchisees constituted wages under the IWPCA. Patel attempted to rebut this reasoning by arguing that “the key inquiry . . . is not the ‘origin point’ of the payment, but rather, which party bears the obligation to pay the Plaintiff.” The court found this argument unconvincing, holding, “In consideration for being allowed to own and operate a store under 7-Eleven’s brand, Patel agreed to share profits with 7-Eleven, which are dependent on the amount of customer sales. That is not a wage-payment arrangement.” As a result, Patel’s class action complaint was dismissed with prejudice.