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Reality check: When is a franchisor a joint employer of franchisee employees?

August 29th, 2017  |  Lorene Park

By Lorene D. Park, J.D.

The increase in court battles over franchisors’ liability as “joint employers” when franchisees violate Title VII, the Fair Labor Standards Act, or other labor laws could reflect the ongoing search by plaintiffs for deep pockets, or increased efforts by businesses to skirt labor laws—depending on your point of view. Many believe it reflects our political divide and the uncertainty of a changing “patchwork” of tests for joint-employer status issued by courts and agencies.

Changes are coming . . . It appears lawmakers are making headway toward a uniform standard, given the July 12 hearing before the House Committee on Education and the Workforce and its introduction on July 27, 2017, of the Save Local Business Act. The Act would amend the NLRA and the FLSA to restore what the bill’s sponsors called “the commonsense definition of what it means to be an employer.” The bill (H.R. 3441), which has bipartisan support, would toss the standard articulated in the NLRB’s recent Browning-Ferris Industries decision and clarify that two or more employers must have “actual, direct, and immediate” control over employees to be considered joint employers. As we await the outcome of these efforts, and regardless of your point of view, it’s worth looking at recent court decisions on when franchisors may be liable under a joint employment theory—for the moment, at least.

First, the patchwork. To provide some context for the court decisions, it helps to understand the tests for joint employer status—they vary by statute and jurisdiction. As noted in a now-withdrawn interpretation by former WHD administrator David Weil, joint employment is defined more broadly under the FLSA and Migrant and Seasonal Agricultural Worker Protection Act (MSPA) than under the common law relied on by courts in the context of Title VII and other statutes. The common law focuses on the control a franchisor exercises over franchisee employees on a day-to-day basis, including how and where the work is done. Courts consider the terms of the franchise agreement or policies; mandatory training; mandatory recordkeeping; whether the franchisor inspects or audits; and the right to terminate, among other things.

In FLSA and MSPA cases, courts look broadly at an individual’s economic dependence on the company (the “suffer or permit to work” language), but the right to control is still important; increased control signals economic dependence. Other factors include: control of employment conditions (method of pay, power to fire); the permanency of the relationship; the skill required (little training indicates greater dependence); whether the work is integral to the business; and whether the franchisor performs administrative functions (e.g., payroll, workers’ comp, taxes).

There is also a “hybrid” test used by the Fourth and Fifth Circuits, among other courts, with respect to Title VII, ADEA, and other statutes. The hybrid test considers elements of both the common law and the economic reality tests. In the Fourth Circuit, for example, nine factors are considered, but three are most important: authority to hire and fire; day-to-day supervision and control of the putative employee; and where and how the work takes place.

Recent cases on franchisor liability. Clearly there is overlap in the various tests. Thus, while employers should focus on cases in their jurisdictions, much can be learned from other as well:

Fourth Circuit has nine factors for ADEA, six for FLSA. In one case, a federal court in Maryland found that a pizza restaurant manager sufficiently alleged that franchisor Ledo Pizza Systems was his joint employer. As to his ADEA claim that he was fired in retaliation for refusing to terminate an older worker, the court looked to the nine-factor hybrid test from the Fourth Circuit in Butler v. Drive Automotive Industries of America, Inc. The allegations suggested Ledo, acting through its corporate employee, had control over hiring and firing, day-to-day supervision, and formal or informal training. Also refusing to dismiss the FLSA retaliation claim, the court found joint employer status well-pleaded through allegations of significant ties between the franchisor and franchisee, suggesting a long-lasting relationship and control by the franchisor. The plaintiff claimed Ledo had at least some power to control and supervise workers and to hire, fire, or modify employment conditions. For example, Ledo required him to provide daily and weekly reports, told him what to stock in the bar, set employee schedules, hired a bartender, and told the plaintiff he was fired. To the court, at least the first four of the six factors set forth by the Fourth Circuit in Salinas v. Commercial Interiors, Inc., could weigh in the plaintiff’s favor (Lora v. Ledo Pizza Systems, Inc.).

Functional control indicates employer status. A federal court in New York refused to dismiss an FLSA collective action by servers, housemen, waiters, housekeepers, and other employees of a hotel franchisee who plausibly claimed the franchisor defendants asserted “functional control” over hotel staff to be liable as joint employers (formal control was not addressed). To establish functional control, they alleged the franchisor defendants: (1) imposed mandatory training programs for hotel staff; (2) maintained the right to inspect the hotel; (3) imposed mandatory recordkeeping requirements; (4) established “standards, specifications[,] and policies for construction, furnishing, operation, appearance, and service of the Hotel;” (5) required that a particular software be used to track hotel revenue and operations; (6) retained the unlimited right to change the manner in which the hotel was operated; (7) performed audits and inspections of compliance with franchisor standards; (8) maintained the right to terminate the franchise, which could cause the termination of staff; and (9) knew the plaintiffs were not paid gratuities but failed to stop the unlawful practices. To the court, this was enough to plausibly allege that the franchisor defendants were joint employers under the FLSA and NYLL (Ocampo v. 455 Hospitality LLC).

Logos and uniforms showed control over franchise, but not workers. An employee of a landscaping franchisee could not show the franchisor exercised enough control over her employment or that other factors suggested it should be held liable as a “joint employer” or “single, integrated employer” under Title VII for the alleged unlawful acts of the franchisee. She relied on the franchisor’s control over logos, uniforms, letterhead, and vehicle color, but a federal court in Virginia explained that control over the franchisee was not relevant and it was control over the plaintiff’s employment that mattered—which was lacking here. The court reviewed the nine factors set forth by the Fourth Circuit in Butler and noted that while not one factor is dispositive, the “common-law element of control remains the principal guidepost’ in the analysis.” (Wright v. Mountain View Lawn Care, LLC).

Franchisor’s training program not enough for joint employer status. In a suit by a Church’s Chicken employee in Alabama who claimed she was not paid proper minimum wages and overtime, a federal court concluded that her general assertion that two franchisors had a management role in a franchisee’s restaurant operations did not render those entities her “employer” under the FLSA. Although a franchise agreement required the franchisee to send its employees to attend a “manager training” program conducted by the franchisors, the training program alone did not turn the franchisors into the employee’s employer. The employee did not allege any facts showing that the franchisors had the power to hire or fire, or make personnel decisions, supervise work schedules, determine pay rate, or maintain records of the franchisee’s employees (Rodriguez v. America’s Favorite Chicken Co. dba Church’s Chicken).

“Ministerial functions” of payroll not enough for liability. In a suit filed under the FLSA and Oregon wage and hour law, a federal court found that Jack in the Box was not the plaintiffs’ “joint employer” after the date it franchised several corporate-owned restaurants to franchisee Northwest Group, Inc. Applying the “economic reality” factors outlined by the Ninth Circuit, the court found that Jack in the Box established that it did not have the power to hire and fire franchisee employees, and it was not involved in franchise employee work schedules, salaries, insurance, fringe benefits, or hours. Although the franchisee was required to use Jack in the Box’s payroll system, such “ministerial functions are insufficient to support plaintiffs’ argument that [defendant] controls labor relations.” Summary judgment was granted for Jack in the Box on this issue (Gessele v. Jack in the Box, Inc.).

Recommending personnel policies not enough. A window cleaning franchisor did not become a joint employer of its franchisee’s employees merely by recommending personnel policies, held a federal district court in Wisconsin, granting summary judgment in favor of the franchisor on employee wage-hour claims. To prove the franchisor was their joint employer, the employees had to show more than that they received a copy of the franchisor’s employee manual and that the franchisee followed the franchisor’s recommendation to pay them on a commission basis. The “critical issue” was that the franchisee was not obligated to follow the manual as drafted. In addition, the franchisor did not have the power to hire and fire them and did not maintain employment records for them. In sum, the court found the minimal control exerted by the franchisor here “nothing like” what would be necessary to demonstrate employer status (Pope v. Espeseth, Inc.).

Creating master franchise plan not enough absent day-to-day control. A national franchisor that created a master franchise plan for commercial cleaning businesses was not the employer of unit franchisee owners under California law, ruled a federal district court in California. The unit franchisees failed to offer any evidence of the franchisor’s actual control over their day-to-day activities, or that it reserved the right to exercise such control. Nor was there evidence that the franchisor controlled their wages or had the authority to stop them from working. Consequently, the court granted the franchisor’s motion for summary judgment (Roman v. Jan-Pro Franchising International, Inc.).

Jani-King cases. Cleaning service franchisor Jani-King is defending suits in several jurisdictions, the main dispute being whether it misclassified franchisees as independent contractors. In one, the Third Circuit affirmed that whether the franchise agreement and manuals gave Jani-King sufficient day-to-day control to make franchisees “employees” will be determined on a class-wide basis. Rule 23’s commonality and predominance requirements were met because the dispute could be resolved by common evidence, including the agreement and manuals, which put controls on franchisees including: where to solicit business, how often to communicate with customers, what to wear, what records to keep, how to advertise, and more. The documents also addressed the nature of the work, tools, and termination (Williams v. Jani-King of Philadelphia, Inc.). Jani-King did score a win in Oklahoma, though, when a DOL enforcement action was dismissed with prejudice because in claiming that all franchisees were “employees,” the agency lumped together the franchisors who were individuals and those franchised through corporate entities, which cannot be “employees” as defined by the FLSA (Acosta v. Jani-King of Oklahoma, Inc.).

Minimizing liability. These decisions suggest steps franchisors can take to decrease the chance of being liable, as a joint employer of franchisee workers, for employment law violations:

Make intent clear. Put it in the franchisor agreement that the franchisor is not the employer, does not have the power to hire, promote, or fire franchisee employees. Have franchisees state in job applications that individuals are hired by the franchisee, not the franchisor.

Stay true to franchise model. Stick to controlling product and service standards on a general level. It is okay to require the use of certain templates or to maintain the brand (e.g., logos, uniforms, letterhead, typical customer greetings, and the like), but don’t micromanage. Remember, courts look to control over an individual’s employment, not over the franchisee.

Leave HR functions to franchisees. In practice, leave to the franchisees the typical human resources and employer functions, such as: hiring/firing, wage rates, scheduling, payroll, staffing levels, performance evaluations, promotions, workers’ compensation insurance, taxes, employee complaints, discipline, and recordkeeping. To the extent template personnel policies are provided to franchisees, make clear that the policies are optional.

Train judiciously. Train your franchisee owners and managers on policies and provide resources for training, but otherwise leave training and rule enforcement to franchisees.