The Franchise Memorandum

A federal district court in Mississippi recently issued a reminder that franchisors should not establish or control their franchisees’ employment policies, practices, or decisions and should not participate in hiring or managing their franchisees’ employees. In  Reese v. Coastal Restoration and Cleaning Services, Inc. d/b/a SERVPRO of Pearl River/Hancock & SW Harrison Counties et al., 2010 U.S. Dist. LEXIS 132858 (S.D. Miss. Dec. 15, 2010), the plaintiff was hired and employed by Coastal Restoration and Cleaning Services, Inc. (Coastal), a SERVPRO franchisee. Reese initially worked as a non-exempt hourly technician, but was later promoted to a salaried position that was classified as exempt from the federal Fair Labor Standards Act’s minimum wage and overtime pay requirements. After his promotion, Reese continued to perform technician work and sued both Coastal and SERVPRO, claiming that he was still non-exempt, that he had not been properly paid for overtime work, and that he had been subjected to a retaliatory pay cut for asserting his right to overtime pay. The federal district court dismissed Reese’s claims against SERVPRO, holding that SERVPRO was not Reese’s “employer” and, therefore, could not be liable to him under the FLSA.

The court applied a four-factor “economic reality” test to determine whether SERVPRO satisfied the FLSA’s expansive definition of an employer. Under the FLSA, an employer includes “any person acting directly or indirectly in the interest of an employer in relation to the employee,” including individuals with “managerial responsibilities” and who exercise “substantial control of the terms and conditions of work.” The four factors that the court analyzed under the “economic reality” test included whether SERVPRO had the power to (1) hire and fire the plaintiff, (2) supervise or control his work schedule or conditions of employment, and (3) determine his  rate and method of payment; and (4) whether SERVPRO maintained employment records. The court found that none of these four factors was satisfied. While Reese argued that various provisions of SERVPRO’s franchise agreement with Coastal, including a requirement that Coastal periodically conduct background checks on employees, established that SERVPRO was his employer, the court found that this language simply related to SERVPRO’s right to set and enforce franchise system quality service standards. The court also found that Reese had presented no evidence that SERVPRO had hired Reese, that it supervised or controlled his schedule or work conditions, that it set his rate or pay, or that it maintained employment records for Reese.