Antitrust Law Daily Wrap Up, TOP STORY—SDNY: Addition of Franchisors as Defendants to Putative Labor Law Class Action Brought by Franchisee-Employees Was Permitted, No Futility, Undue Delay, Bad Faith, or Prejudice, (Nov 12, 2012)

By Peter Reap, J.D., LLM

The motion by several franchised Domino’s pizza restaurant employees to add as defendants corporate franchisors Domino’s Pizza Inc., Domino’s Pizza LLC, and Domino’s Pizza Franchising LLC (the “Proposed Defendants”) to their putative class action originally brought against several New York franchisees and their owners and managers (the “defendants”) alleging violations of federal and New York labor laws was granted by the federal district court in New York City. The amendment would be neither futile nor prejudicial, and the plaintiffs did not act in bad faith or with undue delay (Cano v. DPNY, Inc., November 8, 2012, Francis, J.).

In their First Amended Complaint, the plaintiff employees alleged that the defendants willfully engaged in unlawful employment policies, patterns, or practices, in violation of the Fair Labor Standards Act (the “FSLA”) and New York Labor Law (“NYLL”). They contended that the defendants removed recorded hours from time records and required them to work off-the-clock, as a result of which the plaintiffs were paid less than the minimum wage, were paid less than they were entitled to in overtime wages, and in some cases were not paid for the hours that they worked. The plaintiffs also alleged that the defendants took illegal deductions from their wages, did not provide statutorily mandated breaks, and did not provide the required notice of employment laws, among other things.

In their motion for leave to file a second amended complaint to add the Proposed Defendants, the plaintiffs allege that each of the three entities granted franchises to operate Domino’s Pizza stores in New York under the Domino’s System and sublicenses to use the Domino’s Pizza trademark. They contend that the Proposed Defendants are their employers within the meaning of the FLSA and NYLL.

Amendment to pleadings was generally freely given, and was within the sound discretion of the court. Regarding the use of such discretion, joinder should be permitted absent futility, undue delay, bad faith, or prejudice, the court observed.

Futility

An amendment could be denied as futile if the proposed pleading would not withstand a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure. To overcome objections of futility, the moving party must show that it had colorable grounds for relief.

The FLSA broadly defined an employer as one who “suffer[s] or permit[s]” an employee to work. 29 U.S.C. § 203(g). The definition encompassed working relationships that were not deemed to fall within the employer-employee category prior to enactment of the FLSA. Further, the regulations promulgated under the FLSA expressly recognized that a worker could be employed by more than one entity at the same time.

The Second Circuit identified four factors to be considered under the “economic reality test”: “‘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.’” Herman v. RSR Security Services Ltd., 172 F.3d 132, 139 (2d Cir. 1999). However, no one factor was necessary to establish an employment relationship and simply exercising functional control over workers could be sufficient to be an employer under the FLSA. An entity could be a joint employer under the Act even when it did not hire or fire its joint employees, directly dictate their hours or pay them.

Courts in this circuit had yet to address whether, under the FLSA, a franchisor was an employer of an employee who worked for an independently owned franchise, the court noted. Courts that addressed this issue in other circuits applied the “economic reality test” and generally concluded that franchisors were not employers within the meaning of the FLSA. However, those cases were in a different procedural posture than here. In those cases summary judgment was granted to the franchisor-defendants because the record did not support the arguments that the franchisors were employers.

Here, the plaintiffs pled enough to survive a motion to dismiss, the court held. Most compelling, they asserted that the Proposed Defendants promulgated compensation policies and implemented them through the Domino’s PULSE system which was used at the defendants’ store and included a system of tracking hours and wages and retaining payroll records which was submitted to the Proposed Defendants for their review. In addition, they alleged that the Proposed Defendants created management and operation policies and practices that were implemented at the defendants’ stores by providing materials for use in training store managers and employees, providing posters with directions on how employees perform tasks, and monitoring that performance through required computer hardware and software.

The plaintiffs also contended that the Proposed Defendants developed and implemented hiring policies such as systems for screening, interviewing, and assessing applicants for employment at all of their franchises, and that they had the right to inspect the defendants’ stores to ensure compliance with all of their policies, including those related to the day-to-day conditions of the plaintiffs’ employment. Taken together, these allegations provided enough for the plaintiffs to establish the Proposed Defendants’ joint employer status for the purpose of a motion to amend, according to the court.

Undue Delay and Bad Faith

Delay, absent bad faith or prejudice, was not a sufficient basis for denying leave to amend. While the plaintiffs’ motion to file their Second Amended Complaint was filed in May 2012, they gave notice of their intention to amend the complaint in February 2012. Therefore, assuming that the plaintiffs had information about the Proposed Defendants by approximately July 2011, the plaintiffs waited seven months to seek leave to amend the complaint. That delay was largely attributable to one of the franchisee-defendants’ filing for Chapter 11 bankruptcy, the court noted.

The defendants cited caselaw for the proposition that a delay of seven months or more was inordinate. However, because discovery was far from complete in this case and the Proposed Defendants were on notice since February 2012 that they would be added as defendants to this case, there was no undue delay, the court held.

Prejudice

The defendants claimed that they would be prejudiced if amendment was permitted because it could obligate them to defend and indemnify the Proposed Defendants, which would violate the automatic stay in the bankruptcy case. However, the plaintiffs alleged that the Proposed Defendants were joint employers and, therefore, were jointly and severally liable to the plaintiffs for violations of the FLSA and NYLL. Accordingly, the automatic stay in the bankruptcy case would not extend to the Proposed Defendants and allowing the amendment would not violate the automatic stay, the court determined.

Moreover, both the defendants and the Proposed Defendants argued that the Proposed Defendants would be prejudiced because they did not have an opportunity to contest the conditional collective action certification and the opt-in process. Yet, they did not suggest how the Proposed Defendants would have made different arguments than those that were available to the defendants. As the plaintiffs pointed out, this case was still in the early stages of litigation; formal discovery had not begun and the Proposed Defendants would still have an opportunity to seek decertification of the collective action and oppose class certification. In short, there was no demonstrated prejudice.

The case is No. 10 Civ. 7100 (ALC) (JCF).

Adam Selim Hakki (Shearman & Sterling LLP) for Gil Santiago Cano. Cheryl Marie Stanton (Ogletree, Deakins, Nash, Smoak & Stewart, P.C.) for DPNY, Inc. Christopher Kendric (Goldberg Segalla LLP) for Domino's Pizza LLC.

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