Franchise Lawyer Blog

Franchisors As Joint Employers

Filed in the Southern District of New York, the ongoing case of Cordova v. SCCF, Inc. has interesting implications for restaurant franchisors and franchisees. In the class action lawsuit, the plaintiff employees were delivery persons, stock persons and cleaners at franchise locations owned by individual defendants. The plaintiffs alleged that the defendant franchisor, SCCF, Inc. is a joint employer with the franchisees, and thus, is also liable to plaintiffs for various labor law violations alleged in the complaint. The plaintiffs sued under the federal Fair Labor Standards Act, and New York State’s Labor Law for failing to pay statutory minimum wages and overtime compensation, misappropriating tips and retaliation in connection with filing the lawsuit. SCCF, Inc. moved to dismiss the action, arguing that no employer-employee relationship existed between a franchisor and the plaintiffs. The court held that the plaintiffs had pleaded facts suggesting an employer/employee relationship sufficient to survive a motion to dismiss.

Under the Federal Rule, an employer is defined as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” Both New York State and Federal law hold that a worker may be employed by more than one entity at the same time, even when one worker exerts “ultimate” control over a worker. The Supreme Court has held that determining whether an employer-employee relationship exists should be grounded in economic reality and determined by the totality of the circumstances. The Second Circuit has established several lists of relevant factors for the court to consider, including whether the alleged employer had the power to hire and fire employees; supervised and controlled employee work schedules or conditions of employment; determined the rate and method of payment; and maintained employment records. Other factors identified by the Second Circuit include whether the alleged employer’s premises and equipment were used for the plaintiffs’ work; whether plaintiffs shifted from one putative joint employers’ premises to that of another; the extent to which the work performed by plaintiffs was integral to the overall business operation; whether plaintiffs’ work responsibilities remained the same regardless of where they worked; the degree to which the alleged employer or its agents supervised plaintiffs’ work; and whether plaintiffs worked exclusively or predominantly for one defendant.

The allegations in the plaintiffs’ second amended complaint state that SCCF, Inc. maintains functional control over its franchise locations so as to qualify it as plaintiffs’ employer by: requiring that all food products, supplies and materials meet specifications set by SCCF; developing and implementing hiring and management practices; setting delivery areas and procedures; providing programs to track employees’ performance; requiring the use of a record keeping system to track delivery times, wages and hours; and maintaining the right to inspect the facilities and operations of the franchise locations.

The court, in its decision, noted that the Second Circuit has not yet considered whether a franchisor can qualify as a joint employer. The moving defendants cited decisions from other circuits applying the economic reality test established by the Supreme Court.  The court, however, differentiated from the cases cited, as all were decided on summary judgment motions, after relevant discovery had taken place. As noted above, the Court rejected the portion of the motion to dismiss SCCF, Inc. from the action.

The case is important for restaurant franchisors to follow, as it may provide insight into the standard used by the Second Circuit in identifying what constitutes an employer/employee relationship and what degree of control a franchisor may maintain over its franchisees’ employee policies and management without subjecting itself to liability. This could have direct implications on the way franchise agreements are drafted and negotiated in New York to protect franchisors from vicarious liability, among other things.

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