The Franchise Memorandum

The trend of troublesome wage and hour lawsuits against franchisors continues. In recent months, several new cases have commenced that should serve as an ongoing reminder that when it comes to employment, franchisors should take care not to control or become entangled in their franchisees' day-to-day activities. In the recent cases, various franchisors were sued by their franchisees' employees for alleged violations of the Fair Labor Standards Act (FLSA), on the theory that the franchisor was a "single enterprise" or "joint employer" with the franchisee. Orozco v. Plackis, 2014 U.S. App. LEXIS 12680 (5th Cir. July 3, 2014); Cordova v. SCCF, Inc., 2014 U.S. Dist. Lexis 97388 (S.D.N.Y. July 16, 2014); Gilbert v. Freshbikes, LLC, 2014 U.S. Dist. Lexis 93071 (D. Md. July 9, 2014); Olvera v. Bareburger Group, LLC, 2014 U.S. Dist. LEXIS 94401 (S.D.N.Y. July 10, 2014). In asserting these theories, the employees claimed that the franchisors exercised sufficient control of their franchisees' employment matters, through system standards or day-to-day activities, to "employ" the franchisees' employees for purposes of the FLSA.

In Cordova, Gilbert, and Olvera, the courts declined to grant the franchisors' early motions to dismiss. In denying the motions, the courts cited the broad definition of "employer" under the FLSA, which includes "any persons acting directly or indirectly in the interest of an employer in relation to the employee." The courts also noted that no discovery had yet occurred and that their sole task on a motion to dismiss was to determine, based only on the pleadings, whether the complaint adequately stated a wage and hour claim. In Cordova and Olvera, for example, the Southern District of New York found that the employees plead sufficient facts to proceed on a "joint employer" theory because they alleged that the franchisor issued guidance on how to hire and train employees, set and enforced operational requirements, monitored performance, exercised control over employee work and/or timekeeping practices, and/or required franchisees to keep employment records. Similarly, in Gilbert, the Maryland court found that the employees pleaded sufficient facts to state a claim under the "single enterprise" theory of liability, which holds that two separate entities may constitute a single enterprise if they conduct related activities, perform under unified operations or common control, and operate for a common business purpose.

In Orozco, however, the franchisor fared better at a later phase of litigation. The Fifth Circuit used a four-part economic realities test to reverse a jury's verdict that the franchisor was a joint employer under FLSA. It considered whether the franchisor: (1) possessed the power to hire or fire the employees; (2) supervised their work schedules or conditions of employment; (3) determined pay; and (4) established employment records. Because there was no evidence of such activity, the appellate court reversed the jury verdict and entered judgment for the franchisor.