How Franchising Paved the Way for the Gig Economy

If you walk into a 7-Eleven in California and it’s too hot or cold, don’t blame the franchisee who runs the place. The thermostat is controlled remotely from the company's corporate headquarters in Dallas — as are the store’s hours, prices and the specific kinds of pizza, wings and tacos they can sell.

A group of four franchisees in California are involved in an ongoing suit against 7-Eleven over the extent of the company's control, arguing that it's treating them like employees, but classifying them as independent contractors. If they get so little say on how to run their businesses, the franchisees argue, they should at least receive basic employee protections, like overtime pay and workers' compensation.

Much of the lawsuit rests on Assembly Bill 5, the California law intended to make it harder for gig companies like Uber, Lyft and DoorDash to have sway over their workers without providing employee benefits. And while that 2018 law was drafted in response to today’s gig work environment, it was the franchising industry that originally normalized the labor relations on which the “gig economy” is built.

In the franchise model, a business owner buys the right to run a store under the franchisor's brand. As part of the deal, the franchisee must follow a set of rules laid out by the parent company.

Starting in the 1970s, franchising set a legal precedent for gig companies by helping change the enforcement of U.S. antitrust law, and weakening the labor protections that prevent corporations from misclassifying workers as independent contractors.

The link between franchising and gig work was evident in the lead-up to the election in November. When it looked like Proposition 22 — an ultimately successful bid by gig companies to circumvent California's new labor law — could fail, forcing companies to pay for basic employee protections, executives reportedly started looking into franchising models as a backup plan.

But gig companies were already capitalizing on the business framework that decades of franchising has normalized — an ongoing tension reflected in the 7-Eleven lawsuit.

Family Business

There’s an old 7-Eleven on the outskirts of Fresno with a hot dog sign on the window. It says, “Anyone who is hungry and can't pay for a hot dog can have one for free!” Next to the sign is an illustration of a jolly Lebanese Santa Claus with a big beard, the name “Serge” written across his chest.

That's Serge Haitayan, a man in his 60s who has run the franchise for 30 years.

“Santa’s beard used to be black” he says. “Now, it’s more grayish.”

A refugee from Lebanon, Haitayan came to Los Angeles in the 1980s, and then moved to Fresno — a place he thought would be good to raise a family — where he began running the 7-Eleven store and eventually became a franchise owner.

“My kids were raised in the store,” he says. “I used to go pick them up every day after school, and they would stay in this office, and they would do their homework and they would spend the afternoon in the store. I used to have them open the doors for customers and say, ‘Hello. Good afternoon, good evening, welcome to the store.’ ”

But Haitayan says ever since the 7-Eleven company was bought by a major Japanese retail firm 16 years ago, the store has felt increasingly less like his own. He says he can’t even control the store temperature himself. He points to the place on the wall where his old thermostat used to be, and describes how a few years ago, a crew from the company came, ripped it out and replaced it with one that is controlled remotely from U.S. corporate headquarters in Dallas.

“In what world is that OK for you to live in Dallas and control my temperature here where I am sitting?” he asks. “How do you know my environment? How do you know my body? How do you know everyone else's bodies?”

Increasing Control

Haitayan says there has always been a struggle over control with 7-Eleven. Franchisees have to sign lengthy contracts, obligating them to comply with even lengthier operations manuals. The company's manual is nearly 1,000 pages long, he says. And 7-Eleven can change the rules in the manual at any time.

When he started his franchise back in the 1990s, Haitayan says the company's control was tolerable. But ever since 7-Eleven was bought out, he says, it has increasingly dictated everything from when franchisees can order from vendors to what they can sell.

The final straw for Haitayan was a two-pack of batteries.

Haitayan says a few years ago he suddenly could only order jumbo packs of 14 or 16 batteries. “This is not Costco. This is not Walmart,” he says. “This is a convenience store.”

His customers wanted small packs of batteries, but he says for some reason that inventory had vanished from the system. Over time, the list of products he couldn’t order continued to grow, like certain kinds of sodas, iced teas and cigarettes.

7-Eleven did not respond to multiple requests for comment for this story.

The company has made other changes in recent years. It installed corporate cameras in franchise stores, raised the maximum share of profits the company can keep from 50% to 59%, and increased the focus on food sales, resulting in higher costs for franchisees because they are responsible for covering payroll and have to hire more employees to prepare the food.

For Haitayan, the batteries drove home the reality of how powerless he was. “I feel like nothing but an unglorified store manager without benefits,” he says. So, he joined a handful of other California franchisees in the now more than 3-year-old misclassification lawsuit.

Jaspreet Dhillon, another 7-Eleven franchisee in Southern California, and a plaintiff in the suit, echoes many of the points made by Haitayan. He says for years he didn’t fight the company's control.

“You don’t have time to think,” he says. “You have family, you come home, you’re tired, you rest and the next day you’re up again ready to go again.”

But a few years ago he, like Haitayan, reached his breaking point. “I used to love going to the store,” he says. “Now, I dread it.”

The franchisees, who filed the suit in federal district court in Los Angeles in 2017, initially lost. But the 9th U.S. Circuit Court of Appeals vacated the lower court's ruling in 2018, determining that the judge made a hasty decision and focused too much on the amount of control detailed in the franchisee agreement, rather than the plaintiffs’ allegations of what was actually happening in their stores.

The 7-Eleven decision is now back in a lower federal district court, and a new ruling is expected this month.

‘Prehistory of the Gig Economy’

Brian Callaci, an economist at Data and Society, a nonprofit that researches technology and regulation, recently released a lengthy report on the current level of corporate control in franchising.

“It would be a stretch to call it real independent business ownership," says Callaci, who reviewed more than 500 franchise contracts.

Although he says 7-Eleven is one of the more overbearing franchises, franchisors in general have moved towards more centralized control.

It's not a coincidence that this increase parallels the heightened control in the gig economy, Callaci says, adding that franchising helped lay the legal groundwork for gig companies like Lyft and DoorDash.

“The legal history of franchising is very much the prehistory of the gig economy,” he says.

Before the 1970s, regulators were more likely to use antitrust law to try and stop larger corporations from tightly controlling smaller independent businesses, Callaci says. The prospect of corporate domination, he adds, was a bigger factor in assessing and enforcing antitrust violations.

But through a series of subsequent court cases, franchisors gained the ability to exert greater control over franchisees. In 1977, they scored a major victory in Continental TV v. GTE Sylvania, in which the U.S. Supreme Court ruled that large corporations controlling smaller operators, like franchisees, was intrinsic to the American business model.

That ruling and others like it changed how antitrust laws were enforced in the U.S. The principles of shareholder capitalism became the guiding ideology, with the focus shifting from trying to prevent the domination of smaller independent businesses and workers to strengthening "consumer welfare" and "economic efficiency."

Squeezed Out

Today, there are some 770,000 franchisees in America. Many are immigrants or people of color who had to scrape together money from friends and family to pay the franchise fee required to enter the business. For prime 7-Eleven locations in California, that can amount to hundreds of thousands of dollars.

Dhillon says 7-Eleven promises true business ownership, the American dream. “They paint a rosy picture, but then when you get in you find it’s a different reality.”

Once franchisees get into the business, it’s hard to get out. For one, most franchisees do not own their property. That means if they lose the right to the franchise, they lose their business and their investment, which could mean sacrificing the entire franchise fee.

Haitayan says the power 7-Eleven has over franchisees keeps many of them from speaking up. He hasn’t kept quiet, though.

Haitayan has been involved in several lawsuits against 7-Eleven in recent years, including one over the installation of cameras in stores, which franchisees eventually accepted in a settlement.

Last fall, on Haitayan’s 30th anniversary owning his franchise, he says the company sent him a letter informing him they weren’t renewing the lease and were closing the store.

Haitayan says the store was doing well and he could see no financial reason for to close it down. “Beside saying, ‘We want to teach every franchisee a lesson, that the moment you stand up to 7-Eleven and you create problems and you challenge them and you take them to court, this is what is going to end up happening to you,’ ” he says.

But Haitayan is relatively lucky. Unlike most other 7-Eleven franchisees, he owns his property, which means he was able to reopen it as his own store under a different name. But he says because 7-Eleven neglected to do maintenance for years, he had to spend over a quarter million dollars on renovations.

Even though he's opening his own store, he plans to remain involved in the current lawsuit.

“My fight is still with franchisees and with all the new economy gig employees,” he says, “because they’re not treated fair.”

Haitayan says franchisees and gig workers are in a similar boat because they’re both fighting against companies that he says are taking excessive control over workers without having to provide basic benefits. He says American workers should either be granted employee protections or true independence.

From Franchising to Gig Platforms

Today's franchisors and gig companies have both benefited heartily from the decreasing focus on corporate domination in antitrust enforcement.

With the development of apps, gig companies have gone a step further than the franchise model. Instead of requiring franchisees to buy into the brand to run their own business, gig workers sign up on their platforms to do piecemeal gigs. This "platform argument" has been key to how many gig companies justify their employment practices to regulators.

Gig company executives and their legal teams consistently argue they are not running taxi or delivery businesses, but instead tech companies that have created platforms to connect consumers to independent service providers. Under this platform argument, Uber drivers, Instacart grocery shoppers or DoorDash deliverers are not employees, but rather entrepreneurs running their own businesses.

This argument has been very successful, largely because of the way the U.S. now enforces antitrust law, says University of Utah economist Marshall Steinbaum.

“The business model of gig companies is dependent on the weakening of antitrust,” says Steinbaum, who published a paper on the issue.

If regulators enforced antitrust law the way they used to, Steinbaum says, gig companies would risk being sued for how much they control their supposedly independent contractors. They would be encouraged to classify their workers as employees so that they could continue setting prices and controlling the interaction between independent workers and customers, things that could have triggered antitrust enforcement in the past.

While changes in antitrust enforcement have made it easier for large companies to dictate prices and exert greater control over supposedly independent businesses, they have also become a tool to prevent workers from organizing or forming their own collectives.

If a bunch of taxi drivers got together, made an app and called themselves independent businesses, but collectively set prices, consumers could easily sue them for price fixing, says Steinbaum, pointing to numerous examples of crackdowns on employee coordination.

The reorientation of antitrust enforcement has also helped prevent gig workers from organizing and pushing for higher wages. In 2015, the Seattle City Council passed a measure extending collective bargaining rights to Lyft and Uber drivers. Right after its passage, Lyft, Uber and the city's chamber of commerce sued, claiming the measure violated federal antitrust law — on the grounds that workers would potentially be able to spur price hikes.

After the federal government weighed in, supporting the suit, the council pulled the collective bargaining provision.

Reforming antitrust would require regulators to be honest that “economic efficiency” is not some neutral, objective metric, but an ideological construct, argues Sanjukta Paul, a Wayne State law professor who wrote a study that touched on how gig companies have exerted control over "independent contractors" without using the franchise model.

“When you’re telling someone else what to do and dominating them economically and extracting as much as you can from them, effort-wise, whether it’s a worker or small firm, that is ‘efficiency,' ” she says.

Paul envisions an alternative metric based on social good. “If we can be more systematic and honest about what values we want to promote,” she says, “then we might say it is actually efficient and pro-social to have truck drivers and taxi cab drivers make a living wage so that they can invest in their communities and then invest in green technology for their trucks and cars.”

Paul's pitch — that antitrust law be again used to better protect workers instead of focusing on lowering costs for consumers and making profit for shareholders — could go a long way in helping both gig workers who want employee protections and franchisees like Haitayan who want true independence.