Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Nebraska Legislation Would Clarify That Franchisees Are Not Employees, (Jan 30, 2013)

By Peter Reap, J.D., LLM

A newly introduced Nebraska bill would clarify that, under the Nebraska Franchise Practices Act, a “franchisee” “shall not be deemed an employee under Nebraska 23 law if the franchisee is a party to a franchise agreement that is in 24 compliance with 16 C.F.R. part 436.” Legislative Bill No. 436 was introduced January 22, 2013 and was referred to the Business and Labor Committee January 24, 2013.

In 2011, a similar bill was introduced in the Massachusetts legislature (but failed to become law). That bill (House Bill No. 3513 was introduced June 9, 2011) would have amended the Massachusetts labor, unemployment insurance, and workers’ compensation statutes by including the following (or a very similar) provision: "Notwithstanding the provisions of this section, an individual who owns a franchise, or is a party to a franchise agreement under which he or she is authorized to sell products and/or services (a) in accordance with prescribed methods and procedures; and (b) under service marks, trademarks, trade names and other intellectual property licensed under such agreement, shall not be considered an employee of the franchisor."

The introduction of the Massachusetts legislation came in the wake of rulings involving a franchisor of janitorial cleaning business (Coverall) and allegations that its business model was subject to the coverage of three Massachusetts labor statutes. In the first of those decisions, Coverall North America, Inc. v. Commissioner (¶13,491, Business Franchise Guide 2006-2007 New Developments Transfer Binder), the Massachusetts Supreme Court held that the purchaser of a janitorial cleaning business franchise, whose relationship with the franchisor differed in certain key respects from the typical franchise relationship, was not an independent contractor or even a franchisee, but was an "employee" under the meaning of the Massachusetts unemployment insurance law. Thus, the franchisor was required to pay contributions for the purchaser's (or the claimant's) reported earnings pursuant to the unemployment statute.

Over three years later, a federal district court held that the franchisor had misclassified its Massachusetts franchisees as independent contractors under the meaning of the Massachusetts Independent Contractor Statute in Awuah v. Coverall North America, Inc. (¶14,349, Business Franchise Guide 2009-2010 New Developments Transfer Binder). Instead, the franchisees were employees of the franchisor under the statute, according to the court. Later, a federal district ruled in the same case that the franchisor violated the Massachusetts workers’ compensation law and Wage Act by improperly requiring the franchisee-employee to pay for insurance and by failing to pay the franchisee-employee within a week of the weekly or bi-weekly pay period during which the wages were earned (Business Franchise Guide ¶14,473).

In addition to the Coverall litigation, there have been a number of recent court cases involving franchisees suing their franchisors for violations of state and federal labor laws. For example, in Cano v. DPNY, Inc. (Business Franchise Guide ¶14,941), a motion by several franchised Domino’s pizza restaurant employees to add as defendants the franchisors Domino’s Pizza Inc., Domino’s Pizza LLC, and Domino’s Pizza Franchising LLC (the franchisors) to their putative class action originally brought against several New York franchisees and their owners and managers (the franchisees) alleging violations of federal and New York labor laws, was granted by the federal district court in New York City.

In their First Amended Complaint, the employees in Cano alleged that the franchisees willfully engaged in unlawful employment policies, patterns, or practices, in violation of the Fair Labor Standards Act (the FLSA) and New York Labor Law (NYLL). In their motion for leave to file a second amended complaint to add the franchisors, the employees alleged that the franchisors were their employers within the meaning of the FLSA and NYLL.

In White v. 14501 Manchester, Inc., ED Mo., (Business Franchise Guide ¶14,985) a class of all current and former hourly-paid employees that worked in franchised Hotshots restaurants who shared in any tip pool for a three-year period was conditionally certified in a case brought against the restaurants’ franchisor under the Fair Labor Standards Act (FLSA). For the purposes of conditional certification, the franchisor "permitted or suffered to work" all employees at the restaurants in its system, even those at franchised restaurants.

The employees in White alleged that their forced participation in the tip pool, whereby they were required to share tips with other back of the house and non-tipped employees, such as cooks, dishwashers, and doormen, violated the FLSA. The U.S. Supreme Court noted that whether a relationship was covered by the FLSA turned on the economic realities of the working relationship rather than technical definitions related to employment. Given the FLSA’s broad definition of "employee" and its remedial purpose, the franchisor’s franchise arrangement demonstrated sufficient control for conditional class certification. The court could not make credibility determinations about the disputed nature of the employment relationship at this juncture. The franchisor unsuccessfully argued that the employees were not similarly situated because they included the employees of three independently owned and operated franchises that were not controlled by the franchisor.

In Russell v. Happy’s Pizza Franchise, LLC, WD Mich., (Business Franchise Guide ¶14,983) A subclass of pizza restaurant franchisee employees that brought suit against a franchisor, the franchisor’s owner, and two franchisees could proceed with discovery on the issue of whether the franchisor was an "employer" of the employees under the meaning of the Fair Labor Standards Act (FLSA), despite a provision in the franchisor’s franchise agreements explicitly prohibiting the franchisor from exerting control over the wages and hours of franchisee employees. The employees alleged that the defendants violated the FLSA by failing to pay overtime for hours worked in excess of 40 hours per week.

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