Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—WDMich: “Economic Reality” Controls Whether Franchisor is Employer of Franchisee’s Employees Under Federal Labor Law, (Jan 18, 2013)

By Tobias J. Gillett, J.D., LLM.

A pizza franchisor could not prevent a class of franchisee employees alleging violations of the Fair Labor Standards Act (FLSA) from proceeding to discovery on the issue of whether the franchisor was an employer because the “economic reality” of the parties’ relationship controlled the case, rather than the terms of the franchise agreement, the federal district court in Grand Rapids, Michigan has ruled (Russell v. Happy’s Pizza Franchise, LLC, January 16, 2013, Bell, R.).

The franchisee employees had brought a putative class action complaint against the franchisor, Happy’s Pizza Franchise, LLC, and its owner, Happy Asker (collectively, Happy’s Pizza), alleging that Happy’s Pizza had violated the FLSA by failing to pay overtime for hours worked in excess of forty hours per week. The court later granted the employees’ motion for partial decertification, resulting in separate subclasses organized by the districts in which the employees worked.

In the Western District of Michigan, Happy’s Pizza moved for summary judgment, and the employees moved for leave to conduct discovery necessary to respond to the summary judgment motion. In particular, the employees sought to determine whether Happy’s Pizza constituted an employer for purposes of the FLSA, which defines an employer as “any person acting directly or indirectly in the interest of an employer in relation to an employee.”

Happy’s Pizza contended that it had already provided 16,000 pages of documents, including the franchise agreement, which provided that a franchisee “must hire all employees for the Franchise Business [and] be exclusively responsible for the terms and conditions of employment and compensation.”

Although the court acknowledged that this provision absolved Happy’s Pizza of responsibility as an employer “on paper,” the court concluded that the employees could still conduct discovery to determine “whether the prohibition of control espoused in the Franchise Agreement existed in reality.” The court cited Sixth Circuit precedent for the proposition that “economic reality” controlled whether a party was an employer.

Moreover, Happy’s Pizza’s argument that the information sought was not relevant also lacked merit, since the franchise agreement did not decide whether Happy’s Pizza had responsibility as an employer. As the court found that all discovery to that point had addressed class certification, not the relationship between Happy’s Pizza and the franchisee employees, the court held that the employees could conduct discovery on that issue.

The court also rejected Happy’s Pizza’s arguments that the employees’ motion was untimely and did not sufficiently identify what facts they sought. Although the litigation had been on-going since 2010, most of the time had been spent on class certification, and the case had not been transferred to the Western District of Michigan until 2012. Moreover, Happy’s Pizza had not answered the complaint until August 2012, and the court had not yet entered a discovery schedule. As the employees had filed their motion in July 2012, they had not unduly delayed. Furthermore, the employees sought specific information, and had not merely made “general, conclusory statements” regarding the need for additional discovery.

The case is No. 1:12-CV-323.

Attorneys: David Erik Stevens (Werman Law Office PC) for Courtney Russell. Jessica Dopierala Hite (Asker Perlmuter, PLC) for Happy's Pizza Franchise, LLC.

Companies: Happy’s Pizza Franchise, LLC.

Cases: FranchisingDistribution MichiganNews