The Franchise Memorandum

A district court in the Southern District of New York recently denied a franchisor’s motion to dismiss federal and state law employment claims brought against it by employees of one of its franchisees. Ocampo v. 455 Hospitality LLC, 2016 WL 4926204 (Sept. 15, 2016). Several employees of a Doubletree hotel franchise sued the franchisee and the franchisor of the Doubletree system alleging violations of the Fair Labor Standards Act (“FLSA”) and the New York Labor Law. Doubletree moved to dismiss the claims against it on the grounds that the employees had failed to allege facts from which it could be inferred that Doubletree was a joint employer of the franchisee’s employees for the purposes of the two statutes.

In determining whether an employer-employee relationship could exist between Doubletree and its franchisee’s employees, the court considered two multi-factored tests that it noted provided “a nonexclusive and overlapping set of factors” ultimately focusing on the degree to which Doubletree possessed and exercised control over the franchisee’s employees. The court found the following allegations, taken together, sufficiently alleged an employer-employee relationship between Doubletree and its franchisee’s employees: Doubletree (1) imposed mandatory training programs for hotel employees; (2) maintained the right to inspect the hotel at any time; (3) imposed mandatory recordkeeping requirements; (4) established standards and specifications for hotel construction, furnishing, and operation; (5) required the franchisee to use a particular business software; (6) retained the right to make changes to the manner in which the hotel operated; (7) performed audits of the hotel to check the franchisees’ compliance with recordkeeping requirements and operational standards; (8) maintained the right to terminate the franchise, which would result in the termination of the employees’ employment; and (9) was aware of but failed to stop the franchisee’s unlawful wage practices.

In making its ruling, the court was not persuaded by language in the franchise agreement stating that the franchisee was an “independent contractor” of the franchisor. The court observed that “economic realities, not contractual labels, determine employment status” for FLSA purposes. Of course, the court’s ruling was limited to a determination that the employees had pled enough facts to survive a motion to dismiss. The court noted that the employees may ultimately fail to prove on the merits that Doubletree was a joint employer of the employees. Nonetheless, the court’s ruling is troubling precedent from the perspective of franchisors. With the exception of the last item listed (failure to stop known wage violations), the allegations relied upon by the plaintiffs and the court could all be made against the vast majority of franchisors in operation today. Gray Plant Mooty will continue to monitor the progression of this case and report material updates in future issues of The GPMemorandum.