Contributed by Christina A. Stoneburner

coffeebreak MGD©United District Court Judge Renee Bumb of the District of New Jersey has denied a motion to dismiss claims [PDF of opinion] by four franchisees against their franchisor which allege violations of the FLSA and the New Jersey Wage and Hour Act. 7-Eleven had moved to dismiss the claims based on the fact that the franchisees were not employees of 7-Eleven.

This is really the first shot across the bow filed by 7-Eleven so it is hard to tell where this case will wind up, whether the franchisees will ultimately be found to be employees of 7-Eleven, or whether there were in fact any violations of wage and hour laws.  However, the case brings up an interesting issue of which franchisors should be aware, which is in Judge Bumb’s analysis of who is an employee for purposes of the Fair Labor Standards Act.

The Third Circuit has taken a very expansive view of who is an employee under the FLSA and has instructed courts to look at 6 factors to determine if an individual is an employee.

Those factors are as follows:

(1) the degree of the alleged employer’s right to control the manner in which the work is to be performed;

(2) the alleged employee’s opportunity for profit or loss depending upon his managerial skill;

(3) the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers;

(4) whether the service rendered requires a special skill;

(5) the degree of permanence of the working relationship; and

(6) whether the service rendered is an integral part of the alleged employer’s business.

In the Naik case, the judge was constrained for purposes of the motion to dismiss to accept Plaintiffs’ facts as alleged to be true.  The Plaintiffs alleged a pervasive amount of control by 7-Eleven, including items that may routinely be in franchisor agreements, such as a requirement that the franchisee use only approved vendors and strict directions regarding uniforms and store maintenance.  Often controls over these items are put into place to insure a uniform customer experience and so as not to dilute the franchisor’s brand.  The basic legal rule is that quality control measures expected to be followed by franchisees to insure uniformity does not generally make the franchisor the employer of the franchisee.

The Plaintiffs in Naik allege more than those quality control measures, however.  They allege that 7-Eleven controls all product pricing decisions, controls all bookkeeping, restricts the withdrawal of revenues, runs the franchisees’ employee payroll, and dictates advertising and marketing strategy.  Based on these allegations, Judge Bumb found that the Plaintiffs may be able to prove that they were employees of the franchisor.

Franchisors should be aware that the more controls that they exercise over a franchisee may lead to findings that they are an employer or joint employer for purposes not only of wage and hour laws, but discrimination laws as well.  In those cases where strict controls are exercised, franchisors should pay special attention to whether their franchisees are complying with these laws to try to avoid liability.