Franchisor as Co-Employer Continues to Emerge as Major Issue

In amending the complaint, the plaintiff-employees cited the franchisor's compensation, hiring, training and management policies for all company-owned and franchised Domino's restaurants, including the restaurants in which the plaintiffs worked. The plaintiffs said that Domino's directly or indirectly controlled its franchisees' time-keeping and payroll practices by requiring the use of a proprietary computerized record-keeping system that tracked hours and wages and retained payroll records; that Domino's knew or should have known of the alleged unlawful practices at the franchisee-defendants' restaurants by virtue of said computerized records; and that Domino's had the power to stop the alleged employment violations by terminating, or threatening to terminate, franchise agreements.

Making this case frustrating for franchisors is the fact that the court acknowledged that the plaintiffs did not necessarily meet the hurdle of the four-pronged “economic reality test” for being an employer, as defined by decisions from the U.S. Court of Appeals for the Second Circuit. Usually, this test is enough to stop this type of motion in its tracks. “The court correctly observed that the judiciary in the U.S. Court of Appeals for the Second Circuit has yet to address whether, under the FLSA, a franchisor is an employer of an employee who works for an independently owned franchise and that, notably, courts that have addressed this issue in other circuits have applied the 'economic reality test' and have generally concluded that franchisors are not such employers within the meaning of the FLSA,” wrote Kaufmann. Nonetheless, because the court granted the plaintiffs' motion, Domino's will have to file a motion for summary judgment and go through discovery.

Meanwhile, the U.S. District Court for the Western District of Texas upheld a jury's decision that the founder and principal owner of a franchisor entity was the employer of a kitchen worker at an independently owned franchise. Orozco v. Plackis, 2013 WL 3306844 (W.D. Tex. June 13, 2013), was an action under the FLSA against Craig Plackis, founder and principal of the Craig O's Pizza and Pastaria franchise. The plaintiff, who had worked as a kitchen employee in a franchised restaurant before that location went out of business, claimed Plackis failed to pay him minimum wage and overtime hours as required by the FLSA.

After the jury found in the employee's favor and the court entered judgment, Plackis renewed his previously denied motion for judgment as a matter of law, arguing that the employee failed to present evidence that Plackis was the employer. Plackis pointed out the lack of the types of control that would usually be required to show that he was the employer. “Plackis argued that the plaintiff had testified that Plackis did not hire him, did not have the authority to fire him, did not set up his schedule, did not determine his rate of pay or method of payment and never had discussions with him about his position or work responsibilities,” said John Hughes, partner with DLA Piper in Chicago.

Despite the plaintiff's own testimony, the court found that there was sufficient evidence for the jury to find that Plackis was the employer. The court held that the employee's lack of understanding of the business relationship between the franchisor and franchisee made his testimony non-dispositive. Next, the court pointed to Plackis's review of the employees' hours and advice to the franchisee about how to reduce labor costs ' advice that the franchisee implemented and which changed the plaintiff's working conditions ' as indications of Plackis's control.

Additionally, Hughes noted that the court held that there was sufficient evidence for the jury to find that Plackis individually, as opposed to the franchisor entity, was the employer of the former franchisee's employee.

The decision has been appealed.

Kevin Adler is Editor-in-Chief of FBLA. He can be contacted at [email protected].

During a period when state legislatures wrestle with the issue of when a franchisor is the employer or co-employer of employees of an individual franchisee, lawsuits continue to arise addressing the same complicated issue.

“The motives behind these efforts are rather clear. From the perspective of franchisee employees, adding a 'deep pocket' as a defendant in their Fair Labor Standards Act (FLSA) actions only expands their possibility of recovery for claims of improper employment classification, unpaid overtime and other wage-and-hour violations, especially if the subject franchisee is bankrupt,” commented David J. Kaufmann, senior partner of Kaufmann Gildin & Robbins, in an article in the New York Law Journal.

Kaufmann pointed to Cano v. DPNY d/b/a Domino's Pizza, 287 F.R.D. 251 (S.D.N.Y. 2012), as a recent example. In this case, current and former employees of Domino's franchisees commenced an action against their franchisee-employers to seek damages and injunctive relief under the FLSA and the New York Labor Law. The employees then moved for leave to file an amended complaint naming the franchisor as additional “joint employers” (Domino's Pizza, Inc., Domino's Pizza LLC and Domino's Pizza Franchising LLC, collectively “Domino's”). The motion was granted.

In amending the complaint, the plaintiff-employees cited the franchisor's compensation, hiring, training and management policies for all company-owned and franchised Domino's restaurants, including the restaurants in which the plaintiffs worked. The plaintiffs said that Domino's directly or indirectly controlled its franchisees' time-keeping and payroll practices by requiring the use of a proprietary computerized record-keeping system that tracked hours and wages and retained payroll records; that Domino's knew or should have known of the alleged unlawful practices at the franchisee-defendants' restaurants by virtue of said computerized records; and that Domino's had the power to stop the alleged employment violations by terminating, or threatening to terminate, franchise agreements.

Making this case frustrating for franchisors is the fact that the court acknowledged that the plaintiffs did not necessarily meet the hurdle of the four-pronged “economic reality test” for being an employer, as defined by decisions from the U.S. Court of Appeals for the Second Circuit. Usually, this test is enough to stop this type of motion in its tracks. “The court correctly observed that the judiciary in the U.S. Court of Appeals for the Second Circuit has yet to address whether, under the FLSA, a franchisor is an employer of an employee who works for an independently owned franchise and that, notably, courts that have addressed this issue in other circuits have applied the 'economic reality test' and have generally concluded that franchisors are not such employers within the meaning of the FLSA,” wrote Kaufmann. Nonetheless, because the court granted the plaintiffs' motion, Domino's will have to file a motion for summary judgment and go through discovery.

Meanwhile, the U.S. District Court for the Western District of Texas upheld a jury's decision that the founder and principal owner of a franchisor entity was the employer of a kitchen worker at an independently owned franchise. Orozco v. Plackis, 2013 WL 3306844 (W.D. Tex. June 13, 2013), was an action under the FLSA against Craig Plackis, founder and principal of the Craig O's Pizza and Pastaria franchise. The plaintiff, who had worked as a kitchen employee in a franchised restaurant before that location went out of business, claimed Plackis failed to pay him minimum wage and overtime hours as required by the FLSA.

After the jury found in the employee's favor and the court entered judgment, Plackis renewed his previously denied motion for judgment as a matter of law, arguing that the employee failed to present evidence that Plackis was the employer. Plackis pointed out the lack of the types of control that would usually be required to show that he was the employer. “Plackis argued that the plaintiff had testified that Plackis did not hire him, did not have the authority to fire him, did not set up his schedule, did not determine his rate of pay or method of payment and never had discussions with him about his position or work responsibilities,” said John Hughes, partner with DLA Piper in Chicago.

Despite the plaintiff's own testimony, the court found that there was sufficient evidence for the jury to find that Plackis was the employer. The court held that the employee's lack of understanding of the business relationship between the franchisor and franchisee made his testimony non-dispositive. Next, the court pointed to Plackis's review of the employees' hours and advice to the franchisee about how to reduce labor costs ' advice that the franchisee implemented and which changed the plaintiff's working conditions ' as indications of Plackis's control.

Additionally, Hughes noted that the court held that there was sufficient evidence for the jury to find that Plackis individually, as opposed to the franchisor entity, was the employer of the former franchisee's employee.

The decision has been appealed.

Kevin Adler is Editor-in-Chief of FBLA. He can be contacted at [email protected].