Restaurant Franchisors May Be Liable for Violations of the Fair Labor Standard Act Committed by their Franchisees
The restaurant and hospitality industry has long been a target for labor and wage law suits by employees seeking back wages under the Fair Labor Standards Act (“FLSA”). The newspaper headlines are full of lawsuits against renowned celebrity chefs, such as Tom Colicchio, Mario Batali, and Daniel Boulud, just to name a few. These disputes can be costly as Mario Batali’s $5.25 million settlement demonstrates. Many more FLSA lawsuits may plague the industry if minimum wage increases are approved by local county and state legislatures (see our posts about local wage increases here and here).
In Naik v. 7-Eleven, a New Jersey District Court Judge’s recent decision should place franchisors on alert as it pertains to wage law suits. On August 5, 2014, United District Court Judge Renee Bumb of the District of New Jersey ruled against the franchisor, 7-Eleven, Inc., by refusing to dismiss a wage and hour case where 7-Eleven franchisees claimed to be employees of their franchisor. The Plaintiffs signed franchise agreements with 7-Eleven, Inc., however, Plaintiffs contend that despite being designated as “independent contractors” in the franchise agreement, “the economic reality of the relationship is that the Plaintiffs are employees of Defendant, and, therefore, they are entitled to the protections under the Fair Labor Standards Act.”
Courts apply the “economic reality” test to evaluate the employer/employee relationship under the FLSA. This four-part test generally requires consideration of (1) the power to hire and fire, (2) supervision and control of work schedules and conditions of employment, (3) determining the rate and method of payment, and (4) maintaining employment records. However, the Third Circuit has taken a very expansive view of who is an employee under the FLSA, which Judge Bumb considered in her decision. These include: (1) the degree of the alleged employer’s right to control the manner in which the work is to be performed; (2) the alleged employee’s opportunity for profit or loss depending upon his managerial skill; (3) the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers; (4) whether the service rendered requires a special skill; (5) the degree of permanence of the working relationship; and (6) whether the service rendered is an integral part of the alleged employer’s business.
Although, Judge Bumb’s decision allows the 7-Eleven franchisees suit to proceed against the national franchisor, the Plaintiffs still have the burden to prove their allegations that they were employees and that the franchisor violated federal and state labor laws. To contrast, the Court of Appeals for the Fifth Circuit recently reversed a jury verdict and award for damages for violations of the FLSA entered against the franchisor. In Orozco v. Plackis, the Fifth Circuit examined the facts of the case and determined that although the franchisor provided training to the employees and made employment suggestions on ways to increase profitability, these actions did not demonstrate that the franchisor had control over employment decision sufficient to render them liable as a joint employer. Most importantly, the Fifth Circuit held that language in the franchise agreement regarding the franchisee having to follow the franchisor’s “policies and procedures” regarding the “selection, supervision, or training of personnel” did not suggest that the franchisor had control over or supervised the franchisee’s employees.
Obviously, this test is very fact-intensive and unique for every case, but franchisors need to keep these factors in mind when negotiating their franchise agreements. The franchisor-franchisee relationship requires a delicate balance of powers primarily due to the franchisor’s focus on quality control of its brand and intellectual property, but the franchisor needs to ensure that their brand oversight does not lead to true operational control over the franchisee’s employees or into the day-to-day employment practices of the franchisees.
Doyle, Barlow & Mazard has experience defending hospitality clients in wage and hour suits, and other employment-related matters.