The Franchise Memorandum

The United States Court of Appeals for the Tenth Circuit recently revived a Department of Labor lawsuit alleging that the franchisor Jani-King failed to maintain proper employee records regarding its franchisees as required under the Fair Labor Standards Act. Acosta v. Jani-King of Okla., Inc., 905 F.3d 1156 (10th Cir. 2018). The DOL alleged that the franchise owners—some of whom were individuals and others of which were corporate entities owned by one or two individuals—were actually employees of the franchisor, misclassified as independent contractors, under the Tenth Circuit’s six-factor “economic realities” test. Jani-King filed a motion to dismiss the complaint, which the district courtgranted, finding the corporate entities that had entered into franchise agreements with the franchisor did not qualify as “individuals” under the FLSA and, because the DOL lumped together individual and corporate entity franchisees, the complaint had not alleged sufficient factual allegations to make plausible FLSA claims as to each actor.

In reversing the district court’s decision, the Tenth Circuit found that the franchise owners’ corporate structure was not dispositive, since the economic realities test focuses on the parties’ working relationship, not “the label or structure overlaying the relationship.” Further, even though the complaint did not “specifically name the individuals or entities who allegedly trigger the recordkeeping requirements of the FLSA,” the Tenth Circuit concluded that factual allegations in the complaint gave Jani-King sufficient notice as to which franchisees might be implicated and therefore stated a plausible claim.