Domino's Challenges Joint Employer Liability for Franchisors

After the original defendant corporation, DPNY Inc., a franchisee, filed for bankruptcy, much of the litigation played out in bankruptcy court. On Dec. 4, 2013, Southern District Bankruptcy Judge James Peck entered an order confirming a plan of reorganization under Chapter 11 of the Bankruptcy Code for DPNY, Inc., which included a settlement agreement resolving the wage and hour claims of past and current delivery workers at the four stores of the franchise.

The workers will receive $1.282 million from the franchise, as well as a commitment that the franchise will follow requirements of federal and state labor law on an ongoing basis.

In addition, the plan was made possible only as a result of concessions from Domino's to the franchisee. Specifically, Domino's will not receive certain payments owed by the franchisee until after the delivery workers are paid in full. Domino's also waived some interest payments from the franchisee and reduced the rate of interest. Peck required that the corporation identify those contributions on the record in order to approve a release of claims.

Adding the Franchisor

Domino's required a release because Magistrate Judge James Francis granted plaintiffs' motion in the original wage and hour action to amend their complaint to add Domino's as a defendant. See, Cano v. DPNY , 287 F.R.D. 251 (S.D.N.Y. 2012). The court ruled that, under a Rule 12(b)(6) standard, plaintiffs had pleaded sufficient facts to state a claim against Domino's as a joint employer under the Fair Labor Standards Act (FLSA). While such a result would seem perfectly sensible to most non-lawyer observers, the decision set a new precedent for analyzing franchisor liability under the FLSA.

The court's reasoning applied existing joint employment standards to the facts pleaded, but, in the past, simply invoking the franchise structure has served as a bar to joint employer status. The Domino's case raises the question: Will courts take this cue to apply established FLSA principles to the facts pleaded against franchisors, regardless of their status as franchisors?

The best place to begin the analysis of Francis's decision is the language of the statute itself. The FLSA's definition section does not define the key terms “employ” and “employer.” Instead, it articulates concepts included within the meanings of those terms. For example, under the FLSA, to “employ” includes to “suffer or permit” an individual to work. 29 U.S.C. '203(g). “'Employer' includes any person acting directly or indirectly in the interest of an employer in relation to an employee.” Finally, the statute offers only a circular definition of “employee.” 29 U.S.C. '203(d). An “employee” is “any individual employed by an employer.” 29 U.S.C. '203(e).

The answer to why the definitions are not more definitive lies in Congress's intention to capture an extremely broad set of relationships and not to delimit coverage. As courts have repeatedly held, the FLSA definition of “employer” is “'the broadest definition [of 'employ'] that has ever been included in any one act.” Zheng v. Liberty Apparel Co. Inc. , 355 F.3d 61, 69 (2d Cir. 2003) (quoting United States v. Rosenwasser, 323 U.S. 360, 363 n.3 (1945) (quoting 81 Cong. Rec. 7657 (1937) (statement of Sen. Hugo L. Black)). It “sweeps in almost any work ' done for the employer's benefit or with the employer's acquiescence.” U.S. Dep't of Labor v. Lauritzen, 835 F.2d 1529, 1543 (7th Cir. 1987) (Easterbrook, C.J., concurring).

The FLSA is a remedial statute designed to address the needs of workers who lack sufficient bargaining power to protect minimal labor standards. The drafters drew from earlier child labor statutes. The intention behind those statutes was to look beyond the formal relationships recognized by the common law to see if a party knew about the work and had the power to stop it. See , “Enforcing Labor Standards in the Modern American Sweatshop: Rediscovering the Statutory Definition of Employment,” Bruce Goldstein, Marc Linder, Laurence E. Norton, II, Catherine K. Ruckelshaus, 46 UCLA L. Rev. 983 (1999) (http://bit.ly/1hxbsKn). Any party in that position was liable if children were found to be working illegally. The words adopted from the child labor law, “to suffer or permit ' mean[] that [the employer] shall not ' permit by acquiescence, nor suffer by a failure to hinder.” Curtis & Gartside Co. v. Pigg, 134 P. 1125, 1126 (Okla. 1913)).

'Operational' or 'Functional' Control

A key principle that derives from this understanding of employment is that of joint employment. Under federal regulations, multiple individuals and entities can employ an employee at the same time. 29 C.F.R. '791.2. Therefore, any person or entity that suffers or permits an employee to work or acts directly or indirectly in the interest of an employer is itself an employer. The significance of joint employment, in turn, is that each employer is jointly and severally liable.

In applying this sweeping concept of “employer” under the FLSA, courts have developed the concept of an “economic realities” test, so designated to distinguish it from any test that looks at the formal relationships. Courts have come to label the key ingredient either as “operational” or “functional” control over the business in question. This test is a tool to assist courts in determining whether a putative employer knew about the work and had the power to stop the work or otherwise fix the violations at issue.

The U.S. Court of Appeals for the Second Circuit has issued a series of decisions developing its understanding of operational or functional control in determining whether a defendant is a joint employer under the FLSA. See, Barfield v. N.Y.C. Health and Hosps. Corp., 537 F.3d 132 (2d Cir. 2008); Zheng v. Liberty Apparel Co., 355 F.3d 61 (2d Cir. 2003); and Herman v. RSR Sec. Servs. Ltd. (RSR), 172 F.3d 132 (2d Cir. 1999); see also, Irizarry v. Catsimatidis, 722 F.3d 99 (2d Cir. 2013). The court has found individuals to be liable as joint employers, not based on day-to-day control, but rather because of their operational or functional control. RSR, at 140-41; Irizarry, at 111-17. Having authority over the people who managed the business is sufficient. In Irizarry, for example, the Second Circuit held that a “person exercises operational control over employees if his or her role within the company, and the decisions it entails, directly affect the nature or conditions of the employees' employment.” Id. at 110.

In particular, the court has noted that the power to shut down the business is demonstrative of operational control, and therefore, liability. RSR, at 140; Irizarry, at 115. The Second Circuit has also made clear that employer “status does not require continuous monitoring of employees, looking over their shoulders at all times, or any sort of absolute control of one's employees. Control may be restricted, or exercised only occasionally, without removing the employment relationship from the protections of the FLSA, since such limitations on control do not diminish the significance of its existence.” RSR, at 139 (citation, internal quotation marks omitted).

Indeed, as the court held in Zheng, there is no rigid rule for identifying a FLSA employer and “in certain circumstances, an entity can be a joint employer under the FLSA even when it does not hire and fire its joint employees, directly dictate their hours, or pay them.” Id. at 70.

In another joint employer case, Barfield v. N.Y.C. Health and Hosps. Corp., 537 F.3d 132 (2d Cir. 2008), the court again found liability because the defendant “suffered” the plaintiff's work. The court held the New York City Health and Hospitals Administration liable as a joint employer of a nurse who had worked over 40 hours in many weeks, but through different temporary agencies, rejecting the defendant's argument that it had not reviewed and compared the time records from the different temporary agencies.

The court noted that the defendant possessed the information concerning the plaintiff's work hours. The fact that the defendant had not reviewed the information in its possession did not relieve it of responsibility as an employer. As Judge Benjamin Cardozo stated in a New York Court of Appeals case: “Whatever reasonable supervision by oneself and one's agents would discover and prevent, that, if continued, will be taken as suffered.” People ex rel. Price v. Sheffield Farms-Slawson-Decker Co., 225 N.Y. 25 (1918).

Franchisor Liability

These cases provided the basis for potential franchisor liability in the Domino's case. First, it is clear that the particular formal relationship does not preclude a review of the economic realities of that relationship. Thus, there is no per se rule exempting franchisors from liability as joint employers with their franchisees. It depends on the facts of the relationship, not the label.

Similarly, franchise agreement language declaring a franchisee's employees not to be employees of the franchisors cannot be determinative or it would completely undermine the FLSA. It is a bedrock principle of the FLSA that no entity can contract out of its obligations. See, Brooklyn Sav. Bank v. O'Neil, 324 U.S. 697, 706-07 (1945). The entire purpose of the FLSA is to establish rules that employers and employees cannot bargain their way out of, precisely from a recognition that some employees do not have sufficient bargaining power to sustain a floor of labor standards.

Beyond that, these decisions remind us that the traditional employment test might begin but does not end the inquiry. Even if an entity does not hire, fire or process payroll, it can still be a joint employer under the FLSA. If the clothing manufacturer at the top of a chain of contractors may hold enough control to be deemed a joint employer as in Zheng, a franchisor can also be held liable if it retains comparable control. Whether or not it does is a factual inquiry.

In the Domino's case, the plaintiffs alleged facts concerning corporate Domino's' control over key functions of their jobs, including hiring, management policies, training, staff equipment, uniforms, supplies, delivery areas and methods and procedures for delivery. For instance, the suit alleged that Domino's developed systems for screening, interviewing and assessing employment applicants that were used in its franchise stores in an effort to reduce employee turnover. It also alleged that Domino's imposed specific requirements for delivery employees' work, such as setting delivery areas, monitoring delivery times and specifying the methods and procedures used in preparing and delivering customer orders.

Perhaps most importantly, the plaintiffs alleged that Domino's controlled the record-keeping systems used by the franchise, specifically, records of workers' delivery times and of wages and hours and payroll. Domino's had the right or power to know of employees' unpaid work through the information collected by the trademarked computerized record-keeping system that it required franchisees to use. These records provided information far beyond that required to ensure “quality control” over the food products being served.

As in Barfield, the records to which Domino's had unfettered access, including employee wages and hours, gave them information necessary to determine not only that plaintiffs had worked certain hours but also that they had not been paid for all of that time.

Finally, the plaintiffs alleged that Domino's had the power to terminate the franchise if it determined that the franchise had violated any laws or company policies, or engaged in practices that adversely affected the good will of the Domino's trademark. The plaintiffs argued that these facts showed that Domino's had more than sufficient functional or operational control over the franchise to be considered suffering or permitting the employees' work or to acting indirectly in the interest of the franchise employer, and thus to be liable as a FLSA joint employer.

The plaintiffs did not argue that Domino's hired or fired or even paid franchise workers, since direct or day-to-day control is not necessary. Rather, the plaintiffs pointed to Domino's alleged involvement in the establishment of employment policies and practices, its monitoring of the workers' delivery times, its unfettered access to wage and hour records, and its ability to stop the work by closing or threatening to close the franchise.

Conclusion

As noted above, Second Circuit precedent precludes a “see no evil” defense that the putative joint employer simply did not avail itself of information that it had in its possession. In other words, that Domino's might not have compared its delivery time records to the clock in/clock out times in its possession, which would have demonstrated that the plaintiffs were not paid for all the hours they worked, does not protect it from a finding that it had the capacity to review this information and act on it.

Domino's argued that these points proved too much, specifically that on the plaintiffs' theory, all franchisors would be liable for the conduct of their franchisees. However, the plaintiffs' point was, on the contrary, that the franchise relationship does not determine joint employer status.

A study for the U.S. Department of Labor's Wage and Hour Division noted that in the fast-food industry, FLSA violations are much more common among franchise-owned businesses than businesses directly owned by national or international chains. See, “Improving Workplace Conditions Through Strategic Enforcement, A Report to the Wage and Hour Division,” David Weil, Principal Investigator, Boston University, p. 44-49. If the franchisor, in fact, retains sufficient operational control, it should be held liable as a joint employer under the FLSA, regardless of formal arrangements or disclaimers. This approach honors both the letter and the purpose of the statute.

Richard Blum and Hollis Pfitsch are staff attorneys in the Employment Law Unit of The New York Legal Aid Society. This article also appeared in the New York Law Journal, an ALM sibling of Franchising Business & Law Alert.

After more than three years of litigation, delivery workers for four Domino's pizza restaurants in Manhattan are receiving payments for unpaid wages. The payments of nearly $1.3 million began in January and are divided among approximately 60 delivery workers. The case involves a rare situation: While the original lawsuit was against a franchise and individual franchise owners and managers, Domino's Pizza Inc., the international corporation, was successfully added to the lawsuit in a motion to amend seeking liability of Domino's as a joint employer. While rare, the case applied well-settled principles of joint employment under wage and hour law to bring in the franchisor.

The Case Is Settled

Cano v. DPNY, Inc., No. 10-cv-07100-ALC-JCF (S.D.N.Y), alleged a range of labor law violations, including time-shaving and off-the-clock work, and was originally filed in the Southern District by The Legal Aid Society and Shearman & Sterling as pro bono counsel. (Note: The authors were members of the Legal Aid team.)

After the original defendant corporation, DPNY Inc., a franchisee, filed for bankruptcy, much of the litigation played out in bankruptcy court. On Dec. 4, 2013, Southern District Bankruptcy Judge James Peck entered an order confirming a plan of reorganization under Chapter 11 of the Bankruptcy Code for DPNY, Inc., which included a settlement agreement resolving the wage and hour claims of past and current delivery workers at the four stores of the franchise.

The workers will receive $1.282 million from the franchise, as well as a commitment that the franchise will follow requirements of federal and state labor law on an ongoing basis.

In addition, the plan was made possible only as a result of concessions from Domino's to the franchisee. Specifically, Domino's will not receive certain payments owed by the franchisee until after the delivery workers are paid in full. Domino's also waived some interest payments from the franchisee and reduced the rate of interest. Peck required that the corporation identify those contributions on the record in order to approve a release of claims.

Adding the Franchisor

Domino's required a release because Magistrate Judge James Francis granted plaintiffs' motion in the original wage and hour action to amend their complaint to add Domino's as a defendant. See, Cano v. DPNY , 287 F.R.D. 251 (S.D.N.Y. 2012). The court ruled that, under a Rule 12(b)(6) standard, plaintiffs had pleaded sufficient facts to state a claim against Domino's as a joint employer under the Fair Labor Standards Act (FLSA). While such a result would seem perfectly sensible to most non-lawyer observers, the decision set a new precedent for analyzing franchisor liability under the FLSA.

The court's reasoning applied existing joint employment standards to the facts pleaded, but, in the past, simply invoking the franchise structure has served as a bar to joint employer status. The Domino's case raises the question: Will courts take this cue to apply established FLSA principles to the facts pleaded against franchisors, regardless of their status as franchisors?

The best place to begin the analysis of Francis's decision is the language of the statute itself. The FLSA's definition section does not define the key terms “employ” and “employer.” Instead, it articulates concepts included within the meanings of those terms. For example, under the FLSA, to “employ” includes to “suffer or permit” an individual to work. 29 U.S.C. '203(g). “'Employer' includes any person acting directly or indirectly in the interest of an employer in relation to an employee.” Finally, the statute offers only a circular definition of “employee.” 29 U.S.C. '203(d). An “employee” is “any individual employed by an employer.” 29 U.S.C. '203(e).

The answer to why the definitions are not more definitive lies in Congress's intention to capture an extremely broad set of relationships and not to delimit coverage. As courts have repeatedly held, the FLSA definition of “employer” is “'the broadest definition [of 'employ'] that has ever been included in any one act.” Zheng v. Liberty Apparel Co. Inc. , 355 F.3d 61, 69 (2d Cir. 2003) (quoting United States v. Rosenwasser, 323 U.S. 360, 363 n.3 (1945) (quoting 81 Cong. Rec. 7657 (1937) (statement of Sen. Hugo L. Black)). It “sweeps in almost any work ' done for the employer's benefit or with the employer's acquiescence.” U.S. Dep't of Labor v. Lauritzen, 835 F.2d 1529, 1543 (7th Cir. 1987) (Easterbrook, C.J., concurring).

The FLSA is a remedial statute designed to address the needs of workers who lack sufficient bargaining power to protect minimal labor standards. The drafters drew from earlier child labor statutes. The intention behind those statutes was to look beyond the formal relationships recognized by the common law to see if a party knew about the work and had the power to stop it. See , “Enforcing Labor Standards in the Modern American Sweatshop: Rediscovering the Statutory Definition of Employment,” Bruce Goldstein, Marc Linder, Laurence E. Norton, II, Catherine K. Ruckelshaus, 46 UCLA L. Rev. 983 (1999) (http://bit.ly/1hxbsKn). Any party in that position was liable if children were found to be working illegally. The words adopted from the child labor law, “to suffer or permit ' mean[] that [the employer] shall not ' permit by acquiescence, nor suffer by a failure to hinder.” Curtis & Gartside Co. v. Pigg, 134 P. 1125, 1126 (Okla. 1913)).

'Operational' or 'Functional' Control

A key principle that derives from this understanding of employment is that of joint employment. Under federal regulations, multiple individuals and entities can employ an employee at the same time. 29 C.F.R. '791.2. Therefore, any person or entity that suffers or permits an employee to work or acts directly or indirectly in the interest of an employer is itself an employer. The significance of joint employment, in turn, is that each employer is jointly and severally liable.

In applying this sweeping concept of “employer” under the FLSA, courts have developed the concept of an “economic realities” test, so designated to distinguish it from any test that looks at the formal relationships. Courts have come to label the key ingredient either as “operational” or “functional” control over the business in question. This test is a tool to assist courts in determining whether a putative employer knew about the work and had the power to stop the work or otherwise fix the violations at issue.

The U.S. Court of Appeals for the Second Circuit has issued a series of decisions developing its understanding of operational or functional control in determining whether a defendant is a joint employer under the FLSA. See, Barfield v. N.Y.C. Health and Hosps. Corp., 537 F.3d 132 (2d Cir. 2008); Zheng v. Liberty Apparel Co., 355 F.3d 61 (2d Cir. 2003); and Herman v. RSR Sec. Servs. Ltd. (RSR), 172 F.3d 132 (2d Cir. 1999); see also, Irizarry v. Catsimatidis, 722 F.3d 99 (2d Cir. 2013). The court has found individuals to be liable as joint employers, not based on day-to-day control, but rather because of their operational or functional control. RSR, at 140-41; Irizarry, at 111-17. Having authority over the people who managed the business is sufficient. In Irizarry, for example, the Second Circuit held that a “person exercises operational control over employees if his or her role within the company, and the decisions it entails, directly affect the nature or conditions of the employees' employment.” Id. at 110.

In particular, the court has noted that the power to shut down the business is demonstrative of operational control, and therefore, liability. RSR, at 140; Irizarry, at 115. The Second Circuit has also made clear that employer “status does not require continuous monitoring of employees, looking over their shoulders at all times, or any sort of absolute control of one's employees. Control may be restricted, or exercised only occasionally, without removing the employment relationship from the protections of the FLSA, since such limitations on control do not diminish the significance of its existence.” RSR, at 139 (citation, internal quotation marks omitted).

Indeed, as the court held in Zheng, there is no rigid rule for identifying a FLSA employer and “in certain circumstances, an entity can be a joint employer under the FLSA even when it does not hire and fire its joint employees, directly dictate their hours, or pay them.” Id. at 70.

In another joint employer case, Barfield v. N.Y.C. Health and Hosps. Corp., 537 F.3d 132 (2d Cir. 2008), the court again found liability because the defendant “suffered” the plaintiff's work. The court held the New York City Health and Hospitals Administration liable as a joint employer of a nurse who had worked over 40 hours in many weeks, but through different temporary agencies, rejecting the defendant's argument that it had not reviewed and compared the time records from the different temporary agencies.

The court noted that the defendant possessed the information concerning the plaintiff's work hours. The fact that the defendant had not reviewed the information in its possession did not relieve it of responsibility as an employer. As Judge Benjamin Cardozo stated in a New York Court of Appeals case: “Whatever reasonable supervision by oneself and one's agents would discover and prevent, that, if continued, will be taken as suffered.” People ex rel. Price v. Sheffield Farms-Slawson-Decker Co., 225 N.Y. 25 (1918).

Franchisor Liability

These cases provided the basis for potential franchisor liability in the Domino's case. First, it is clear that the particular formal relationship does not preclude a review of the economic realities of that relationship. Thus, there is no per se rule exempting franchisors from liability as joint employers with their franchisees. It depends on the facts of the relationship, not the label.

Similarly, franchise agreement language declaring a franchisee's employees not to be employees of the franchisors cannot be determinative or it would completely undermine the FLSA. It is a bedrock principle of the FLSA that no entity can contract out of its obligations. See, Brooklyn Sav. Bank v. O'Neil, 324 U.S. 697, 706-07 (1945). The entire purpose of the FLSA is to establish rules that employers and employees cannot bargain their way out of, precisely from a recognition that some employees do not have sufficient bargaining power to sustain a floor of labor standards.

Beyond that, these decisions remind us that the traditional employment test might begin but does not end the inquiry. Even if an entity does not hire, fire or process payroll, it can still be a joint employer under the FLSA. If the clothing manufacturer at the top of a chain of contractors may hold enough control to be deemed a joint employer as in Zheng, a franchisor can also be held liable if it retains comparable control. Whether or not it does is a factual inquiry.

In the Domino's case, the plaintiffs alleged facts concerning corporate Domino's' control over key functions of their jobs, including hiring, management policies, training, staff equipment, uniforms, supplies, delivery areas and methods and procedures for delivery. For instance, the suit alleged that Domino's developed systems for screening, interviewing and assessing employment applicants that were used in its franchise stores in an effort to reduce employee turnover. It also alleged that Domino's imposed specific requirements for delivery employees' work, such as setting delivery areas, monitoring delivery times and specifying the methods and procedures used in preparing and delivering customer orders.

Perhaps most importantly, the plaintiffs alleged that Domino's controlled the record-keeping systems used by the franchise, specifically, records of workers' delivery times and of wages and hours and payroll. Domino's had the right or power to know of employees' unpaid work through the information collected by the trademarked computerized record-keeping system that it required franchisees to use. These records provided information far beyond that required to ensure “quality control” over the food products being served.

As in Barfield, the records to which Domino's had unfettered access, including employee wages and hours, gave them information necessary to determine not only that plaintiffs had worked certain hours but also that they had not been paid for all of that time.

Finally, the plaintiffs alleged that Domino's had the power to terminate the franchise if it determined that the franchise had violated any laws or company policies, or engaged in practices that adversely affected the good will of the Domino's trademark. The plaintiffs argued that these facts showed that Domino's had more than sufficient functional or operational control over the franchise to be considered suffering or permitting the employees' work or to acting indirectly in the interest of the franchise employer, and thus to be liable as a FLSA joint employer.

The plaintiffs did not argue that Domino's hired or fired or even paid franchise workers, since direct or day-to-day control is not necessary. Rather, the plaintiffs pointed to Domino's alleged involvement in the establishment of employment policies and practices, its monitoring of the workers' delivery times, its unfettered access to wage and hour records, and its ability to stop the work by closing or threatening to close the franchise.

Conclusion

As noted above, Second Circuit precedent precludes a “see no evil” defense that the putative joint employer simply did not avail itself of information that it had in its possession. In other words, that Domino's might not have compared its delivery time records to the clock in/clock out times in its possession, which would have demonstrated that the plaintiffs were not paid for all the hours they worked, does not protect it from a finding that it had the capacity to review this information and act on it.

Domino's argued that these points proved too much, specifically that on the plaintiffs' theory, all franchisors would be liable for the conduct of their franchisees. However, the plaintiffs' point was, on the contrary, that the franchise relationship does not determine joint employer status.

A study for the U.S. Department of Labor's Wage and Hour Division noted that in the fast-food industry, FLSA violations are much more common among franchise-owned businesses than businesses directly owned by national or international chains. See, “Improving Workplace Conditions Through Strategic Enforcement, A Report to the Wage and Hour Division,” David Weil, Principal Investigator, Boston University, p. 44-49. If the franchisor, in fact, retains sufficient operational control, it should be held liable as a joint employer under the FLSA, regardless of formal arrangements or disclaimers. This approach honors both the letter and the purpose of the statute.

Richard Blum and Hollis Pfitsch are staff attorneys in the Employment Law Unit of The New York Legal Aid Society. This article also appeared in the New York Law Journal, an ALM sibling of Franchising Business & Law Alert.