Franchisor Defendants Were ‘Joint Employers’ In FLSA Action

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By Joy Waltemath and Lorene D. Park, J.D. — Refusing to dismiss franchisor defendants from an FLSA collective action by 23 employees of a hotel franchisee, a federal district court in New York found that the plaintiffs plausibly alleged that the franchisor defendants asserted “functional control” over hotel employees such that they could be liable as joint employers. For example, the franchisor defendants required certain training, established mandatory quality assurance and other standards, performed unannounced inspections to ensure compliance, and retained the right to terminate the franchisee (Ocampo v. 455 Hospitality LLC, September 14, 2016, Karas, K.).

franchisorFLSA suit. A group of banquet servers, housemen, a houseman supervisor, banquet supervisors, restaurant waiters, a kitchen sous chef, a room service water, and housekeepers who worked for 455 Hospitality at a Double Tree by Hilton Hotel filed suit under the FLSA and New York Labor Law (NYLL) on behalf of a putative class, seeking unpaid minimum wages, overtime, and tips. They also claimed violations concerning recordkeeping and wage statements. In prior proceedings, the court granted in part a motion for conditional certification of a collective action.

Franchisor seeks early exit. Moving to dismiss, Doubletree Franchise LLC and Doubletree Hotel Systems, Inc. (the franchisor defendants) asserted that they could not be held liable for the alleged violations because neither qualified as an “employer” under the applicable laws.

Franchisor agreement considered in resolving motion. As an initial matter, the court found that even though the plaintiffs did not attach the franchise agreement (and amendments) to the complaint, the court could consider the agreement as “integral” in that the complaint relied heavily on the franchise agreement’s terms and effect. Indeed, the plaintiffs expressly referred to the document eight times in the paragraphs setting forth the allegations against the franchisor defendants and the complaint included terminology and concepts plainly drawn from the agreement, including in alleging that the defendants exerted control over hotel employees.

Franchisor defendants may be joint employers. On the merits, the court denied the motion, finding that the plaintiffs pleaded sufficient facts to plausibly suggest functional control by the franchisor defendants so as to hold them liable as joint employers under the FLSA and NYLL. Considering the “economic reality” of the situation to determine whether there was an employment relationship, the court considered the nonexclusive factors set forth by the Second Circuit for analyzing “functional control” over employees. (Because the plaintiffs did not argue that the franchisor defendants satisfied the four-factor formal control test, the court did not analyze whether formal control was exerted here.)

To establish functional control, the plaintiffs alleged that the franchisor defendants: 1) imposed mandatory training programs for hotel employees; 2) maintained the right to inspect the hotel; 3) imposed mandatory recordkeeping requirements; 4) established “standards, specifications[,] and policies for construction, furnishing, operation, appearance, and service of the Hotel;” 5) required that a particular software be used to track hotel revenue and operations; 6) retained the unlimited right to change the manner in which the hotel was operated; 7) performed audits and inspections to review compliance with franchisor standards; maintained the right to terminate the franchise, which could cause the termination of employees; and 9) knew the plaintiffs were not paid gratuities owed to them but failed to stop the unlawful practices. In the court’s view, these allegations, taken together, plausibly alleged that the franchisor defendants were the plaintiffs’ joint employers under the FLSA and NYLL.

Economic realities, not contractual labels, define relationship. Although the franchise agreement labeled 455 Hospitality an “independent contractor,” the court explained that economic realities, not contractual labels, determine employment status for the remedial purposes of the FLSA. In this suit, the economic realities alleged by the plaintiffs supported an inference that the franchisor defendants exerted control over hotel employees, including performing inspection/audits (both scheduled and unannounced) to check on compliance with franchisor standards and monitoring employees. While the power to terminate the franchisee (thus leading to employee terminations) would not be enough by itself to create a joint employment relationship, the plaintiffs here had alleged more.

Source:: Employment Law Daily Newsfeed

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