The Franchise Memorandum

Elsewhere, a federal court in North Carolina granted in part and denied in part a motion for partial judgment on the pleadings in a case in which the franchisee’s principals asserted that they were employees of the franchisor. Elsayed v. Family Fare LLC, 2020 WL 780701 (M.D.N.C. Feb. 18, 2020). Family Fare entered into a franchise agreement for a gas station convenience store with Almy, LLC, a company owned by plaintiff Elsayed. Family Fare subsequently terminated the agreement based upon allegations that Almy had skimmed proceeds from lottery ticket sales. Elsayed then sued Family Fare asserting various claims under state and federal law, including claims for unpaid overtime under the Fair Labor Standards Act (FLSA) and the North Carolina Wage and Hour Act. Family Fare answered the complaint and filed a motion for partial judgment on the pleadings.

The court granted Family Fare’s motion as to the state claims while denying it for the FLSA claim. Both decisions turned on whether Family Fare could be deemed to be Elsayed’s employer. In the North Carolina Wage and Hour Act, the North Carolina legislature expressly stated that a franchisor was not a franchisee’s employer for purposes of the statute. In contrast, under the FLSA, there was no such definitive exclusion. Even though the franchise agreement explicitly stated that no employer-employee relationship existed between Family Fare and Elsayed, the court determined the degree of control Family Fare exercised over Elsayed could permit the conclusion that an employer-employee relationship existed. Important to the court’s determination were allegations that Family Fare made significant decisions at the store, such as what was sold, the price, and advertising; Family Fare supervised Elsayed to the extent that it would not let him sell certain items or give a customer an occasional complimentary coffee; that Family Fare dictated the terms and conditions of employment, such as when the store opened and closed as well as uniforms; that Family Fare commanded Elsayed to follow orders; that the relationship was longterm; and that Family Fare’s business depended on franchisees like Elsayed. Taken together, Elsayed pleaded joint employer status sufficiently for his FLSA claim to survive judgment on the pleadings.