Restaurant franchisors are facing efforts from both the National Labor Relations Board (NLRB) and the U.S. Department of Labor (DOL) to make them joint employers of franchisees' employees. The Board's efforts have caught the attention of Congress where a House subcommittee held a hearing on the Board's reexamination of its joint employment test. Most of the invited panel of witnesses who testified at the September 9, 2014 hearing before the House Education and Workforce Subcommittee opposed the Board's actions, which they view as an attack on the franchise model.    

Not to be left out of the fray, the DOL's 2014-2018 Strategic Plan identifies securing wages and overtime from "vulnerable workers," defined in part as workers in the franchise restaurant industry, as one of its strategic objectives.

At the same time, the number of lawsuits under the Fair Labor Standards Act (FLSA) continues to rise. According to testimony from the Government Accountability Office to a House subcommittee on July 23, 2014, this increase is due in part to more attorneys being willing to file FLSA cases, as well as evolving FLSA case law and ambiguity about how to apply the FLSA.

Recently, two federal court decisions highlighted a prime example of ambiguity in the application of the FLSA in the restaurant franchise industry. Both cases considered whether and under what test a restaurant franchisor may be considered the employer of its franchisee's employees for the purpose of FLSA liability. In short, the issue was whether the franchisor and franchisee are "joint employers" of the franchisee's employee, and thus jointly liable for violations of the FLSA.

The two decisions further demonstrate how the applicable joint employer test varies by jurisdiction and how application of the test can vary according to the phase of litigation.

In Olvera v. Bareburger Group LLC, the U.S. District Court for the Southern District of New York held that the franchisee employees' claims for unpaid wages against both the franchisee and the franchisor should not be dismissed in the early stages of the case because the claims were adequate to show that the franchisor exercised formal and functional control over the employees. The employees alleged, in part, that the franchisor: (1) guided franchisees on "how to hire and train employees"; (2) set and enforced requirements for the operation of franchises; (3) monitored employee performance; (4) specified the methods and procedures used by employees to prepare customer orders; (5) exercised control, directly or indirectly, over the work of employees; (6) required franchises to "employ recordkeeping" of operations, including "systems for tracking hours and wages and for retaining payroll records"; and (7) exercised control over their franchisees' timekeeping and payroll practices.

The court noted that these allegations of franchisor control were sufficiently specific to avoid dismissal of the lawsuit on the issue of joint employment and, if true, would meet both the formal control test and the functional control test.

The formal control test, which has been widely used in many jurisdictions, looks at whether the franchisor: (1) has the power to hire and fire; (2) supervises and controls work schedules or conditions of employment; (3) sets the rate and method of payment; and (4) maintains employment records.

The functional control test is more expansive and looks at: (1) whether the franchisor's premises and equipment were used by the plaintiffs; (2) the extent to which the plaintiffs performed a discrete line-job that was integral to the alleged employers' processes of production; (3) the degree to which the alleged employers or their agents supervised the plaintiffs' work; and (4) whether the plaintiffs worked exclusively or predominantly for the alleged employers. Not all of the factors must exist to create joint employment, and other factors not listed by either test may be relevant. All factors and circumstances are to be viewed in light of the economic realities of the relationship.

In Orozco v. Plackis, however, the Fifth Circuit Court of Appeals vacated a jury verdict in favor of Orozco, the franchisee's employee, because the evidence did not support the jury's finding that the franchisor was Orozco's employer.  This decision illustrates that just because an employee avoids early dismissal of a joint employment claim, or even takes a claim to trial, does not mean the franchisor will ultimately be held liable.  Like in Olvera, the franchisee's employee in Orozco beat the franchisor's motion to dismiss by alleging that the franchisor: (1) made regular visits to the franchisee's restaurant; (2) regularly discussed customer comments and complaints with the franchisee owners and provided input for improvement; (3) had the authority to select and hire the franchisee's managers; and (4) selected and set up the franchisee's time-keeping systems and trained the managers on how to use them. The employee also claimed that employees trained by the franchisor needed no training to work for the franchisee and that the franchisor and franchisee at times shared services of the same employee.

In reviewing the evidence presented to the jury, however, the Fifth Circuit found that the evidence did not support a finding that the  franchisor actually exerted control over the franchisee's operations.

Employers' bottom line: Franchisors should be aware of the various applicable tests for joint employment, particularly the NLRB's test and the courts' tests under the FLSA, and operate within the guidance of legal authority where possible. To the greatest extent possible, franchisors should avoid actual or apparent control over the terms and conditions of employment between franchisees and their employees.