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“Franchise model” under threat?

October 22nd, 2014  |  Lisa Milam-Perez  |  Add a Comment

By Lisa Milam-Perez, J.D.

Some of the most compelling (and potentially impactful) questions that labor and employment lawyers contend with these days go to the heart of the traditional employment relationship—the very notion of which is teetering on increasingly shaky ground. Who is an “employee” (or “independent contractor,” or “intern”)? Who is the “employer” — i.e., who is liable when an employee’s legal rights are violated? As for the latter, plaintiffs’ attorneys, labor unions, and worker advocates of late have been looking to hold large companies accountable for violations committed downstream by subcontractors, suppliers, staffing agencies, and related entities.

Federal and state agencies have, too. David Weil, the U.S. Department of Labor’s Wage and Hour Administrator, has written of “the fissured workplace,” suggesting (in a provocative tome that predated his April 2014 appointment to the post) that the DOL should focus its enforcement efforts on employers that ostensibly seek to off-load potential liability by deliberately structuring their business organizations and operations accordingly. “[L]arge corporations have shed their role as direct employers of the people responsible for their products, in favor of outsourcing work to small companies that compete fiercely with one another,” notes a teaser for the book. Among the business models deemed suspect: the franchise.

And it’s not just the DOL. NLRB General Counsel Richard Griffin caused quite a stir last August when he said he would authorize complaints against McDonald’s Corp. based on alleged labor law violations by McDonald’s franchisees, under a theory that the fast-food giant is a joint employer of the aggrieved workers. Of course, fast food makes up a sizeable chunk of the franchised industry, and these companies are already feeling the heat of an ongoing, labor-backed drive to raise workers’ wages and secure organizing rights through coordinated national protests and job actions.

State labor agencies and progressive state officials have taken up the cause as well. For example, when New York Attorney General Eric Schneiderman announced last week that he’d filed a $2 million lawsuit against a Papa John’s franchise for underpaying delivery drivers, Fast Food Forward, an “alt-labor” group behind much of the fast-food dust-up, was offered prime real estate in the attorney general’s official press release, with a quote from the group’s organizing director calling the lawsuit “the latest reminder that giant fast-food companies like Papa John’s must ensure that its franchise holders abide by the law and treat workers fairly.”

Fighting back. Facing attack on numerous fronts, the franchise industry has come out swinging. The International Franchise Association (IFA), the industry’s trade group, successfully lobbied California Governor Jerry Brown last month to veto S.B. 610, a bill that would have imposed stronger restrictions on a franchisor’s right to terminate a franchise agreement, among other provisions. Meanwhile, in Washington, IFA members testified at a September House Workforce Committee hearing on “expanding joint employer status”—the primary purpose of which was to lambaste the NLRB’s recent actions in that vein. As for those fast-food protests? The IFA quickly launched a PR counter-offensive, decrying the “union-led” campaign as “part of an overt effort to undermine franchising.”

Franchisee discrimination? Most recently, in a challenge to the city of Seattle’s new $15-an-hour minimum wage ordinance, the IFA filed suit contending that franchises were unfairly taking it on the chin. The organization hopes to prevent the municipality from enforcing the law against small franchised businesses, saying it was a “blatant discriminatory attack” against them. Why? The ordinance classifies franchises as “large employers” if the franchise network collectively employs more than 500 workers nationwide. In contrast, it grants a seven-year phase-in period for other employers with 500 or fewer workers. “Being classified as large businesses would require the small franchised businesses to pay higher wages sooner than other small businesses,” the IFA notes. “As such, they would be at a significant competitive disadvantage, potentially resulting in job losses and closed businesses.” According to the IFA, there are serious questions in play as to whether this “discriminatory treatment of small franchisees was motivated by economic protectionism, animus, and a desire to ‘break’ the franchise model.” The organization has asked a federal court to enjoin the city and require that “all small businesses be treated the same under the minimum wage ordinance.”

Janitors “franchisees”? The franchise industry has reason to be defensive these days, given that these entities have been on the hot seat. But there’s been overreaching on the industry’s part, to be sure. In one long-running Massachusetts case against Coverall North America, a commercial cleaning “franchisor,” the company called its janitorial workers “franchisees” and then misclassified them as independent contractors, in violation of the state’s Independent Contractor Statute. Coverall entered into “janitorial franchise agreements” with the janitorial workers to provide commercial cleaning services to third-party customers. Along with forking over an initial “franchise fee” to enter into an agreement, the franchisees paid additional installments to the company during the course of the contract. Coverall trained the franchisees, provided them with uniforms and identification badges, contracted with and billed customers, and received a percentage of the revenue earned on every cleaning service. It only paid the janitors for their services once the customers paid the company, rather than when they actually performed the work.

Coverall insisted it wasn’t in the cleaning business but rather, the franchising business, and it didn’t “employ” anyone who cleans. This troubled the court. “Describing franchising as a business in itself,” it wrote, “sounds vaguely like a description for a modified Ponzi scheme—a company that does not earn money from the sale of goods and services, but from taking in more money from unwitting franchisees to make payments to previous franchisees.” Quoting Justice Brandeis in a subsequent ruling in the case, the court noted there is a “general feeling that the whole system of paying fees for jobs is unjust.” But it stopped short of holding that the franchise distribution system at issue violated Massachusetts public policy.

A similar class action against Coverall was later brought by “franchisees” in California. In addition to California Labor Code violations, the janitors claimed the company breached their franchise agreements and committed fraud and unfair practices by removing customer accounts from them without cause so that it could resell those accounts to other franchisees. After two years of litigation, the suit culminated in a settlement agreement that included a $475 payment and injunctive relief for each plaintiff and an attorneys’ fee award of nearly $1 million.

The IFA had pushed back during the Coverall litigation as well—deploying its boilerplate language about the “threat to the entire franchise business model” and contending that the court’s holding “brings into question the legitimacy of every business that relies on contractually related firms as sources of revenue.” From the looks of things, it will become an increasingly familiar lament, as these “threats” to the franchise model will only continue to escalate.

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J.C. Penney fails in attempt to use “pick-off strategy” to short-circuit FLSA collective action

October 17th, 2014  |  Ron Miller  |  Add a Comment

The convergence of the collective action provisions of the FLSA, with the offer of judgment provision of FRCP 68, and the “case” or “controversy” requirement of Article III, Sec. 2 of the Constitution has resulted in the litigation strategy known as the “pick-off.” Essentially, the employer extends an offer of judgment to every plaintiff that fully satisfies their claims, thereby rendering the case moot under Article III and divesting the court of subject-matter jurisdiction before the case ripens into a collective action.

In Genesis Healthcare Corp v Symczyk, the U.S. Supreme Court let stand that strategy but left open a key question: when does an offer of judgment rejected by the named plaintiffs moot the lawsuit?

Recently, in Anjum v J.C. Penney Co, Inc, retailer J.C. Penney attempted to avoid an FLSA collective action by making Rule 68 offers of judgment to the named plaintiffs in the case. Although opt-in plaintiffs filed written consents to join the collective action after J.C. Penney had extended its offer and the named plaintiffs rejected it, a federal district court in New York determined that the rejected offers would moot the lawsuit only when it had entered a judgment, and that the offer itself did not moot the lawsuit.

“Pick-off strategy”. J.C. Penney extended offers of judgment under Rule 68 to the named plaintiffs in an effort to “pick-off” the plaintiffs and avoid a lengthy collective action. The employer’s offer was purported to extend complete relief to all named plaintiffs, including damages, liquidated damages, interest, and reasonable attorneys’ fees and costs to be determined by the court. With respect to the opt-in plaintiffs, J.C. Penney moved to strike their consents on the ground that the named plaintiffs improperly solicited the forms. The employer hoped to defeat the plaintiffs’ anticipated argument that its failure to offer relief to the opt-in plaintiffs preserved the case.

Here, the plaintiffs raised four primary theories as to why the lawsuit remained a justiciable controversy: (1) the pick-off play is disfavored as a matter of public policy; (2) an FLSA case cannot be mooted if a motion for conditional certification is pending (even where, as here, the plaintiffs filed the motion after rejecting the offer); (3) J.C. Penney’s offer did not in fact extend all the relief the plaintiffs could possibly recover in the lawsuit; and (4) the presence of opt-in plaintiffs with unsatisfied claims preserves the controversy. Objections such as those raised by the plaintiffs have often defeated motions to dismiss such as J.C. Penney’s.

The Second Circuit first held in Abrams v. Interco Inc., that a defendant’s tender of everything the plaintiff could conceivably recover in a lawsuit will render the lawsuit moot, even if the plaintiff insists on maintaining the action. Although the Second Circuit has not directly applied this rule to an FLSA collective action, district courts in the circuit have generally concluded that the rule does apply to such actions.

Genesis Healthcare emphatically rejected two express exceptions to mootness that the Second Circuit previously carved out in the context of Rule 23 class actions, including the relation back doctrine. The relation back doctrine cannot apply in an FLSA collective action because a Rule 23 class has independent legal status, whereas an FLSA collective class does not. Second, Genesis Healthcare strongly implied that broader policy-based objections simply will not revive an otherwise moot lawsuit after the named plaintiffs’ claims have been satisfied. Thus, the Court refused to reject the use of the pick-off maneuver.

Still, the court determined that the Second Circuit’s rulings in McCauley v. Trans Union, L.L.C., and Cabala v. Crowley, compelled the conclusion that an offer of judgment affording complete relief does not extinguish the live controversy unless and until the court actually enters judgment over the plaintiffs objections. Without jurisdiction, the court could not impose the obligation to pay damages extinguishes the controversy, nor achieve the disposition that resolved the controversy such that the court loses jurisdiction.

Effect of offer of judgment. Although the court determined that J.C. Penney’s methodology for calculating damages was basically sound, it found flaws in the damages period established by J.C. Penney, the fact that it included only one liquidated damages award for both the FLSA and NYLL claims, and it did not include a separate award for pre-judgment interest.

However, the court pointed out that many offers of judgment might be so obviously sufficient that they do not raise the question of whether the offer affords complete relief. On the other hand, other offers will call for closer scrutiny to determine whether they afford complete relief. In applying that scrutiny, the court directly determines the value of the plaintiff’s stake in the lawsuit, and then determines whether the offer meets or exceeds the maximum. Thus, while the value of the plaintiff’s stake remains a contested question, the underlying controversy cannot be considered dead.

In this instance, the court was not convinced that J.C. Penney’s offer afforded all of the remedy to which the named plaintiffs were entitled. The mere existence of issues concerning whether the offers afforded complete relief, and the consequent need for court adjudication of the maximum value of each plaintiff’s stake foreclosed the possibility that the Rule 68 offer of judgment extinguished the controversy at the time J.C. Penney made the offer.

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Millions in grants awarded to help improve outcomes of individuals with disabilities

October 16th, 2014  |  Deborah Hammonds  |  Add a Comment

The U.S. Department of Education’s Office of Special Education and Rehabilitative Services (OSERS) recently announced more than $121 million in grants will be awarded to help improve the outcomes of individuals with disabilities. Using a “cradle through career” approach, the monies are aimed at promoting inclusion, equity and opportunity for all children and adults with disabilities to help ensure their economic self-sufficiency, independent living and full community participation.

“These investments are significant in assisting individuals with disabilities to reach their full potential,” said U.S. Secretary of Education Arne Duncan in an October 8 press statement. “We want all individuals with disabilities to succeed and these investments symbolize our values and commitment as a nation toward achieving excellence for all.”

Among the grants, OSERS’ Rehabilitation Services Administration (RSA) awarded $47 million to fund its comprehensive and coordinated programs of vocational rehabilitation, supported employment and independent living for individuals with disabilities. And, OSERS’ National Institute on Disability and Rehabilitation Research (NIDRR) distributed $19 million to institutions of higher education and private and non-profit organizations for innovative, cutting-edge research projects.

Some of the key grants awarded by OSERS include:

University of North Carolina at Charlotte’s Technical Assistance Center on Postsecondary Education – Funded at $2.5 million, the National TA Center on Improving Transition to Postsecondary Education and Employment for Students with Disabilities (Transition Center) is the first major investment funded jointly out of RSA and OSEP to create a seamless transition process from high school through employment. The Transition Center will work with states, school districts, and vocational rehabilitation agencies to implement evidence-based and promising practices and strategies to ensure that students with disabilities, including those with significant disabilities, graduate from high school with the knowledge, skills, and supports needed for success in postsecondary education and employment.

University of Massachusetts Boston – Funded at $9 million for the next three years, the Job-Driven Vocational Rehabilitation TA Center (JDVRTAC) at the University of Massachusetts-Boston will assist state vocational rehabilitation agencies in developing training and employment opportunities for individuals with disabilities that meet the needs of employers and the demands of the local economy.

Gallaudet University – Funded at $950,000, Washington, D.C.-based Gallaudet University will support research and training to improve the accessibility, usability, and performance of technology for individuals who are deaf and hard of hearing.

TransCen – Funded at $875,000, TransCen, a non-profit organization dedicated to improving educational and employment outcomes for people with disabilities will support research and training to improve vocational rehabilitation practices for youth and young adults with disabilities.

OSERS’ Office of Special Education Programs (OSEP) also awarded $54 million to support research, demonstrations, technical assistance, technology, personnel development and parent-training and information centers. The OSEP grants include $8.7 million to WestED in San Francisco to create a Center for Systemic Improvement (CSI). The $8.7 million grant becomes the largest technical assistance  investment ever funded by OSERS.

A complete list of OSERS new FY 14 grant awards is available on the U.S. Department of Education website.

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Compliance reviews under new OFCCP scheduling letter will begin October 16

October 8th, 2014  |  Cynthia L. Hackerott  |  Add a Comment

The OFCCP will not schedule supply and service compliance evaluations from October 1 through October 15, 2014 in order to allow contractors time to review and become acquainted with the new compliance review scheduling letter and accompanying itemized listing, the agency announced last week. These newly revised documents will allow the OFCCP to seek more, and more detailed, information from federal contractors during the desk audit phase of compliance evaluations. The number of items contained in the itemized listing has increased from 11 to 22, and now includes information on reasonable accommodation policies, more specific demographic information on employment decisions, more precise data for compensation analysis (aggregate data rather than the disaggregate data) and more data regarding compliance with Section 503 of the Rehabilitation Act of 1973 (Section 503) and the Vietnam Era Veterans’ Readjustment Assistance Act of 1974 (VEVRAA).

The Office of Management and Budget (OMB) approved the new scheduling letter and itemized listing, along with a revised compliance check letter, on September 30, 2014 — three years after the OFCCP submitted a revised proposal regarding changes to these documents. A notice announcing this approval, and highlighting some of changes, was published in the September 30, 2014 edition of the Federal Register (79 FR 58807-58808). OMB approval of all three documents, which are now posted on the OMB’s RegInfo.gov website, expires on March 31, 2016.

Notice of the revised proposal was published in the September 28, 2011 edition of the Federal Register (76 FR 60083-60084). The revised proposal addressed comments received regarding the OFCCP’s initial proposal issued in May of that year (76 FR 27670-27671) and, in response to those comments, contained several changes to the original proposal. The comment period on the revised proposal closed on October 28, 2011. The documents approved by the OMB on September 30, 2014 incorporate some, but not all, of the proposed changes from the 2011 revised proposal, as well as changes that the OFCCP states are needed to obtain the information required for evaluating the Section 503 and VEVRAA affirmative action programs under revised regulations which took effect earlier this year.

Changes to scheduling letter and itemized listing The September 30, 2014 Federal Register notice highlights the following approved changes:

  • The scheduling letter will continue to allow contractors to submit employment activity data by either job group or job title. Thus, the OMB apparently rejected the OFCCP’s request to require contractors to submit data by job group and job title.
  • Contractors will continue to provide this data by sex; however, they will submit race and ethnicity information using five specified categories instead of two broad categories (i.e., minority and nonminority).
  • Regarding its compensation data requirements, the itemized listing will no longer requires that contractors submit annualized aggregate compensation data. Instead, contractors will be required to submit individualized employee compensation data as of the date of the workforce analysis in their Affirmative Action Programs, also noting the job title, job group and EEO-1 category.
  • The definition of compensation is revised to include consideration of hours worked, incentive pay, merit increases, locality pay, and overtime.
  • The revised letter requires contractors to provide the data electronically but only if they maintain it in an electronic format that is useable and readable.
  • Several changes were made to the itemized listing to reflect regulatory changes since the letter was last approved, including changes to the OFCCP regulations regarding compensation, and regarding workers with disabilities and protected veterans.

Compliance check letter. The specific documents sought in the revised compliance check letter remain unchanged.

Supporting statement. The OFCCP’s supporting statement, which details the changes and the rationales behind them, and related documents are posted on the RegInfo.gov website at: http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201104-1250-001.

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Courts, NLRB deliver blow to FedEx independent contractor model

October 7th, 2014  |  Joy Waltemath  |  Add a Comment

In the past six weeks, FedEx’s independent contractor model has suffered a triple blow. First, in a late August decision that the concurring judge said “substantially unravels FedEx’s business model,” the Ninth Circuit ruled in two companion decisions that FedEx delivery drivers are employees, not independent contractors, as a matter of California and Oregon law.

Next, at the end of September, a divided NLRB held that, although D.C. Circuit decisions required it to reexamine its approach in independent contractor cases, it would decline adopt the appeals court’s interpretation of Sec. 2(3) of the NLRA and accordingly found that FedEx Home Delivery drivers were employees entitled to coverage under Sec. 2(3).

Finally, the first week of October, the Kansas Supreme Court determined that FedEx delivery drivers who drive on a full-time basis were employees as a matter of law under the Kansas Wage Payment Act and not independent contractors.  This most recent case covers drivers in Kansas and is part of the same multidistrict litigation as the California and Oregon cases decided by the Ninth Circuit just over a month earlier.

How did we get here? When a wave of lawsuits challenged FedEx’s independent contractor model (with cases filed in 40 states), the Judicial Panel on Multidistrict Litigation consolidated the cases for multidistrict litigation proceedings in a federal district court in Indiana. The MDL court held that nearly all of the plaintiffs were independent contractors as a matter of law in those states where their status was guided by common law agency principles. That holding applied to the California and Oregon full-time delivery drivers in the Ninth Circuit companion cases.

When the Judicial Panel on Multidistrict Litigation consolidated the class actions, it designated the Kansas class action as the lead case. The district court determined that the Kansas class plaintiffs were independent contractors under the KWPA and granted summary judgment in favor of FedEx. On appeal, the Seventh Circuit concluded that Kansas law did not clearly indicate how it should decide a close case like this one and accordingly certified to the Kansas Supreme Court whether the drivers were employees of FedEx as a matter of law under the Kansas act.

Ninth Circuit right to control test. FedEx drivers were identified as independent contractors under the company’s operating agreement (OA) that governed the parties’ relationship. While the OAs were fairly clear, the Ninth Circuit found that to the extent they were ambiguous, extrinsic evidence supported a finding that FedEx exercised substantial enough control over the drivers to suggest they were not “independent contractors.”  The court considered the following:

  • FedEx’s extensive and detailed grooming and appearance standards, “from their hats down to their shoes and socks.”
  • FedEx’s equally meticulous vehicle specifications, including being painted a specific shade of white, marked with the FedEx logo, conforming to specific dimensions.
  • Drivers’ work hours are adjusted by FedEx managers so that they work 9.5 to 11 hours daily; they cannot leave their terminals in the morning until all their packages are available and must report back to the terminals before a specified time.
  • FedEx determines what packages to deliver and when. Each driver is assigned a specific service area that only can be altered at FedEx’s sole discretion.
  • FedEx’s right to control the workers’ “entrepreneurial opportunities”; drivers’ ability to operate more than one vehicle or route was contingent on FedEx’s approval. To hire additional help, drivers had to be “in good standing” and replacement drivers had to be “acceptable” to FedEx.

What did they think? California also takes into consideration the parties’ beliefs as to the nature of their relationship, and the OA said the drivers were independent contractors and disclaimed any authority to direct drivers as to the manner or means of their work. But other contract provisions, plus other policies and procedures, allowed FedEx to exert considerable control over the drivers’ day-to-day work. Neither FedEx’s belief nor the drivers’ own perceptions provided the final answer. Simply calling the drivers independent contractors didn’t make it so.

Plus, the drivers’ work was “wholly integrated” into the company’s operations. “The drivers look like FedEx employees, act like FedEx employees, are paid like FedEx employees,” the Ninth Circuit noted. And picking up and delivering packages is not just part of FedEx’s regular business, it is “essential to FedEx’s core business.”

Kansas Supreme Court. As the Seventh Circuit discovered, the Kansas Supreme Court had not specifically identified a test to definitively determine employment status under the KWPA. But Kansas courts have long emphasized the right to control test, and the primary distinction between it and the economic reality test used under the FLSA to determine employee-independent contractor status is that under the economic reality test, the right to control is not considered the single most important factor. The Kansas court ultimately determined that the 20-factor test is a tool to be used in Kansas to determine whether an employer/employee relationship exists under the KWPA, and this test includes economic reality considerations, while maintaining the primary focus on an employer’s right to control.

Although the district court primarily focused on the statements in the drivers’ operating agreement, saying the actual control that FedEx exercised over the drivers was not the question, the Kansas Supreme Court found that how FedEx implemented the operating agreement was a compelling factor in determining the company’s right to control its drivers. Viewing the factors as a whole, the Kansas high court concluded that FedEx had established an employment relationship with its delivery drivers but had dressed the relationship in independent contractor clothing.

NLRB. The issue in the NLRB decision was whether drivers operating out of a FedEx Home Delivery terminal in Connecticut were employees covered under Sec. 2(3) or, instead, were independent contractors, excluded from coverage. Although the Board had taken the position that the drivers were statutory employees, the D.C. Circuit subsequently held that drivers performing the same job at two FedEx facilities in Massachusetts were independent contractors. Acknowledging that this decision raised important questions about the Board’s approach in independent contractor cases, the Board decided to reexamine its approach.

Common law agency tests. The D.C. Circuit had found the common-law agency test was the appropriate legal standard, but over the course of recent decisions, the standard had changed its focus from the employer’s right to control to the “significant entrepreneurial opportunity for gain or loss.” Acknowledging that all common law considerations were relevant, the appeals court concluded that an important way to evaluate those factors was whether the position presented the opportunities and risks inherent in entrepreneurialism.

But the Board was not convinced. It had never held that entrepreneurial opportunity, in and of itself, was sufficient to establish independent contractor status, it said. In fact, “if a company offers its workers entrepreneurial opportunities that they cannot realistically take, then that does not add any weight to the company’s claim that the workers are independent contractors.” Thus, the Board rejected the D.C. Circuit’s view that it treated entrepreneurial opportunity as the decisive factor. While actual entrepreneurial opportunity for gain or loss remains relevant, it was just one aspect of a factor that asks whether the evidence tends to show that the worker is, in fact, rendering services as part of an independent business, said the Board, finding again that the FedEx Home Delivery drivers were employees under Sec. 2(3).

The Ninth Circuit decisions are Alexander v FedEx Ground Package System, Inc dba FedEx Home Delivery and Slayman v FedEx Ground Package System, Inc dba FedEx Home Delivery, Inc.  The decision of the NLRB is FedEx Home Delivery, a division of FedEx Ground Package Systems, Inc., and the Kansas Supreme Court decision is Craig v FedEx Ground Package System, Inc.

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