Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D.N.Y.: Franchisor was joint employer of franchisee’s employees, (Jul 14, 2014)

By Ronald Miller, J.D.

The franchisor of a chain of organic fast food restaurants was denied a motion to dismiss it from a class action brought by employees of their franchise operators on the basis that it was not their joint employer along with the franchisee. Based on the economic reality of the relationship between the employees and the franchisor, the federal district court in New York determined that their complaint plausibly pleaded that the franchisor was a joint employer for purposes of the Fair Labor Standards Act (FLSA) and New York Labor Law (NYLL) (Olvera v. Bareburger Group, LLC, July 10, 2014, Engelmayer, P.).

The franchisee, the plaintiffs’ direct employer, owned and operated two restaurants pursuant to contracts with the franchisor. The plaintiffs worked as porters, dishwashers, food preparers, and cooks at the restaurants. They alleged the defendants, the franchisee and franchisor, failed to pay minimum wage, overtime, or spread-of-hours compensation as required by the FLSA and NYLL. They also alleged that the franchisor was a joint employer for purposes of both statutes.

Definition of employer. Because the relevant sections of the FLSA and NYLL applied only to employers, the employees could state a claim only against parties whom those statutes define as “employers.” Accordingly, the question before the court was whether the complaint pleaded sufficient facts to allege a plausible claim that the franchisor was the employees’ “employer” under the statutes. An individual may simultaneously have multiple “employers” for purposes of the FLSA, in which case “all joint employers are responsible, both individually and jointly, for compliance with all the applicable provisions of the [FLSA].”

Whether an employer-employee relationship exists for purposes of the FLSA is grounded in economic reality. Thus, the determination of whether defendants are plaintiffs’ joint employers is to be based on “the circumstances of the whole activity” in light of the “economic reality.” Moreover, the remedial nature of the FLSA warrants an expansive interpretation of its provisions so that they will have “the widest possible impact in the national economy.”

Economic reality test. “When it comes to ‘employer’ status under the FLSA, control is the key,” the court observed. In assessing economic reality, the Second Circuit has articulated two tests for determining whether an employment relationship existed for the purposes of the FLSA, one relating to formal control, the other to functional control. The formal control test asks “whether the alleged employer (1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.” As to the functional control test, the Second Circuit has identified a number of non-exclusive factors: (1) whether [the alleged employers’] premises and equipment were used for the plaintiffs’ work; (2) whether the [subcontractors] had a business that could or did shift as a unit from one putative joint employer to another; (3) the extent to which plaintiffs performed a discrete line-job that was integral to [the alleged employers’] process of production; (4) whether responsibility under the contracts could pass from one subcontractor to another without material changes; (5) the degree to which [the alleged employers] or their agents supervised plaintiffs’ work; and (6) whether plaintiffs worked exclusively or predominantly for [the alleged employers].

The statutory standard for employer status under NYLL is nearly identical to that of the FLSA. Although the New York Court of Appeals has not yet resolved whether NYLL’s standard for employer status is coextensive with the FLSA’s, there is no case law to the contrary. Thus, the court in this instance applied the economic reality analysis to both statutes.

Employer status. The court rejected the franchisor’s contention that the complaint failed to plead supporting facts to enable a plausible inference that the franchisor was an employer under the FLSA or NYLL. Noting that control is the key factor in determining whether an entity or person qualifies as an employer, the court concluded that the complaint alleged sufficient facts to support the inference that the franchisor exercised control over the employees’ employment at the two franchise restaurants.

The facts pleaded satisfied either the “formal” control test or the “functional” control test. Specifically, the complaint alleged that the franchisor: (1) guided franchisees on “how to hire and train employees”; (2) set and enforced requirements for the operation of franchises; (3) monitored employee performance; (4) specified the methods and procedures used by those employees to prepare customer orders; (5) exercised control, directly or indirectly, over the work of employees; (6) required franchises to “employ recordkeeping” of operations, including “systems for tracking hours and wages and for retaining payroll records”; and (7) exercised control over their franchises’ timekeeping and payroll practices.

The complaint also alleged that the franchisor had the right to inspect the facilities and operations of franchises, to audit any franchise’s financial records, and to terminate the franchise agreement and the operations of any restaurant that violated the FLSA or NYLL. It was further alleged that the individual franchisor defendants determined the wages and compensation of the employees of franchisees, including the plaintiffs, and established the employees’ schedules, maintained employee records, and had the authority to hire and fire employees. As a result, at this stage of proceedings, the complaint allegations stated a plausible claim that the franchisor was a joint employer under the FLSA and NYLL. Therefore, the franchisor’s motion to dismiss was denied.

The case number is 14 Civ. 1372 (PAE).

Attorneys: Michael Antonio Faillace (Michael Faillace & Associates) for Eduardo Olvera. Salvatore Joseph Acquista (Acquista & Associates, PC) for Bareburger Group LLC and Bareburger Inc. Stephen D. Hans (Stephen D. Hans & Associates) for East 87 Burgers LLC and East Side Burgers LLC.

Companies: Bareburger Group LLC; Bareburger Inc.; East 87 Burgers LLC; East Side Burgers LLC

Cases: FranchisingDistribution NewYorkNews