The Franchise Memorandum

A federal court in New York recently denied judgment on the pleadings for two franchisors in a wage and hour putative class action involving franchisee employees. McArdle-Bracelin v. Congress Hotel, LLC, 2022 WL 486805 (N.D.N.Y. Feb. 17, 2022). The named plaintiff worked for an Embassy Suites and a Hilton hotel, and filed the lawsuit on behalf of a putative class comprised of non-exempt servers, waiters, bartenders, waitstaff, room-service attendants and others. Bringing claims against both the franchisees of the hotels where she worked and the franchisors who licensed them, the plaintiff alleged the hotels failed to comply with New York law regarding record keeping and the distribution of service fees to service employees. The franchisors moved for judgment on the pleadings, arguing that they are not joint employers under New York labor law.

The court denied the motion, finding the plaintiff to have alleged sufficient facts to make plausible her claim that the franchisors could be considered joint employers under New York law, which uses a standard largely similar to that of the Fair Labor Standards Act. Under the FLSA, there are two tests to determine if a party falls within the definition of an “employer”: the “formal control” test and the “functional control” test. The court found the first inapplicable because the plaintiff did not allege that the franchisors had hiring and firing power, supervised or controlled employees’ schedules, set pay rates or methods of payment, or maintained employment records. But the court found the plaintiff did allege facts sufficient to demonstrate “functional control” of the franchisors, because she alleged that the franchisors imposed mandatory training programs for the franchisees’ employees, enforced operational standards, could end the employees’ employment by terminating the franchise agreement, required franchisees to use specific software, retained the right to inspect the franchisees’ records, and had knowledge that franchisee employees were not being paid service fees to which they were entitled. In light of these various controls, the court found that the “economic realities” alleged in the complaint were “sufficient, if barely, to state a claim,” and the franchisors were not entitled to judgment on the pleadings.